UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the transition period from __________________to __________________

~~000~~001-~~19879~~34236

(Commission file number)

BIOSPECIFICS TECHNOLOGIES CORP.

(Exact Name of Registrant as Specified in Its Charter)


Delaware	11-3054851
(State or Other Jurisdiction	(I.R.S. Employer
of Incorporation or Organization)	Identification No.)

2 Righter Parkway, Suite 200, Wilmington, DE 19803
(Address of Principal Executive Offices) (Zip Code)

302.842.8450
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for comply with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	BSTC	The Nasdaq Capital Market

As of ~~August~~November 76, 2020, there were 7,344,955 shares of Common Stock, par value $0.001 per share, outstanding.

Table of Contents

BIOSPECIFICS TECHNOLOGIES CORP.

TABLE OF CONTENTS

		Page
	PART I – FINANCIAL INFORMATION

ITEM 1.	Financial Statements	45

	Unaudited Condensed Consolidated Financial Statements	45

	Condensed Consolidated Balance Sheets	45

	Condensed Consolidated Income Statements	56

	Condensed Consolidated Statements of Stockholders’ Equity	67

	Condensed Consolidated Statements of Cash Flows	8

	Notes to Condensed Consolidated Financial Statements	9

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2223

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	29

ITEM 4.	Controls and Procedures	2930

	PART II – OTHER INFORMATION

ITEM 1.	Legal Proceedings	2930

ITEM 1A.	Risk Factors	30

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3135

ITEM 6.	Exhibits	3336

	Signatures	3437

Table of Contents

Introductory Comments – Terminology

Throughout this Quarterly Report on Form 10-Q, the terms “BioSpecifics,” “Company,” “we,” “our,” and “us” refer to BioSpecifics Technologies Corp. and its subsidiary, Advance Biofactures Corp.

Throughout this Quarterly Report on Form 10-Q, Endo Global Ventures, a Bermuda unlimited liability company, an affiliate of Endo International plc, and Endo International plc are referred to collectively as “Endo.”

Introductory Comments – Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of, and made pursuant to the safe harbor provisions of, the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, expected revenue growth, and the assumptions underlying or relating to such statements, are “forward-looking statements.” The forward-looking statements in this Quarterly Report on Form 10-Q include statements concerning, among other things, (i) the opportunity for minimally invasive non-surgical treatment XIAFLEX® in several potential pipeline indications; (ii) whether and when the Company will receive from Endo the results of their full commercial assessment and analysis regarding XIAFLEX® research and development (R&D) pipeline; (iii) the Company’s ability to achieve its future growth initiatives with regard to Dupuytren’s Contracture and Peyronie’s disease; (iv) the expansion of the market for XIAFLEX® through future growth initiatives; (v) whether treating uterine fibroids with XIAFLEX® will achieve the advantages over major surgery identified by the Company; (vi) Endo’s interest in currently unlicensed indications, including capsular contracture of the breast, Dercum’s disease, knee arthrofibrosis, urethral strictures, hypertrophic scars and keloids; (vii) whether XIAFLEX® will be the only U.S. Food and Drug Administration (FDA) approved nonsurgical therapy for frozen shoulder (adhesive capsulitis); (viii) the projected receipt of payments from Endo and sublicense income payments based on Endo’s partnerships; (ix) ~~and~~ the strength of the Company’s IP portfolio; (x) the timing and successful completion of the Merger (xas defined below); (xi) future litigation relating to the Offer (as defined below) and/or the Merger; and (xii) the impacts of the novel coronavirus (COVID-19) global pandemic, including, without limitation, the impact of COVID-19 on the health and welfare of Endo’s and our employees and on Endo’s and our businesses (including any response to COVID-19 such as anticipated return to historical purchasing decisions by Endo’s customers, the economic impact of COVID-19, changes in consumer spending, decisions to engage in certain medical procedures, future governmental orders that could impact Endo’s and/or our operations and the ability of Endo’s manufacturing facilities and suppliers to fulfill their obligations to Endo).

In some cases, these statements can be identified by forward-looking words such as "expect," "plan," "anticipate," "potential," "estimate," "can," "will," "continue," “believe,” the negative or plural of these words, and other similar expressions. These forward-looking statements are predictions based on the Company’s current expectations and the Company’s projections about future events and various assumptions. There can be no assurance that the Company will realize its expectations or that the Company’s beliefs will prove correct. There are a number of important factors that could cause the Company’s actual results to differ materially from those indicated by such forward-looking statements, including, but not limited to: the timing of regulatory filings and action; the ability of Endo to achieve its objectives for XIAFLEX® and Qwo™; the market for XIAFLEX® in, and timing, initiation, and outcome of clinical trials for, additional indications, which will determine the amount of milestone, royalty, mark-up on cost of goods sold, license, and sublicense income that the Company may receive; the potential of XIAFLEX® to be used in additional indications; Endo modifying its objectives or allocating resources other than to XIAFLEX® and Qwo™; the risks and uncertainties inherent in the Offer and the Merger, including, among other things, regarding how many of the Company’s stockholders will tender their shares in the Offer, the possibility that competing offers will be made, the ability to obtain requisite regulatory approvals relating to the acquisition, the ability to satisfy the conditions to the closing of the Offer and the Merger, the expected timing of the Offer and the Merger, the risk of litigation relating to the transaction, including resulting expense or delay, difficulties or unanticipated expenses in connection with integrating the Company’s operations into Endo’s and the possibility that anticipated synergies and other benefits of the transaction will not be realized in the amounts anticipated within the expected timeframe or at all; the impacts of the novel coronavirus (COVID-19) global pandemic (such as, without limitation, the scope and duration of the pandemic and the resulting economic crisis and levels of unemployment, governmental actions and restrictive measures implemented in response, material delays and cancellations of certain medical procedures, potential manufacturing and supply chain disruptions and other potential impacts to Endo’s and/or our business as a result of COVID-19); and other risk factors identified herein and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”), specifically in Part I, Item IA of the 2019 Annual Report under the heading “Risk Factors” and under the section “Management’s Discussion and Analysis”, and in the Company’s Quarterly ~~Report~~Reports on Form 10-Q for the period ended March 31, 2020. ~~All~~and ~~forward-looking statements included in this Quarterly Report on Form 10-Q for the fiscal period ended~~ June 30, 2020. ~~are made as of the date hereof~~Additionally, are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q and, except as may be required by law, we assume no obligation to update these forward-looking statements.

Table of Contents

the prolonged impact of COVID-19 could heighten the impact of one or more of such risk factors. All forward-looking statements included in this Quarterly Report on Form 10-Q for the fiscal period ended September 30, 2020 are made as of the date hereof, are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q and, except as may be required by law, we assume no obligation to update these forward-looking statements.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

BioSpecifics Technologies Corp.

Condensed Consolidated Balance Sheets


	~~June~~September 30,		December 31,
	2020		2019
		(unaudited)		(audited)
Assets
Current assets:
Cash and cash equivalents	$	162,~~871~~873,~~522~~726	$	4,999,183
Short term investments		8283,~~180~~844,~~784~~739		84,239,918
Accounts receivable		1113,~~696~~593,~~598~~641		19,065,919
Prepaid expenses and other current assets		1,~~310~~757,~~388~~250		966,456
Total current assets		~~112~~102,~~059~~069,~~292~~356		109,271,476

Long-term investments		2034,~~791~~321,~~278~~898		16,569,024
Property and equipment, net		6461,~~839~~366		—
Operating lease right-of-use asset		~~201~~181,~~228~~783		239,491
Patent costs, net		~~531~~511,~~989~~345		573,277
Other assets		~~133~~124,~~159~~348		—
Total assets	$	~~133~~137,~~781~~270,~~785~~096	$	126,653,268

Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses	$	21,~~090~~461,~~056~~380	$	998,409
Income tax payable		~~1,673,051~~—		354,984
Current portion of lease obligation		7879,~~560~~770		69,099
Total current liabilities		31,~~841~~541,~~667~~150		1,422,492

Lease obligation		~~126~~106,~~822~~500		167,014
Deferred tax liability, net		~~395~~307,~~858~~457		572,660
Total liabilities		41,~~364~~955,~~347~~107		2,162,166

Commitments and Contingencies
Commitments and contingencies

Stockholders' equity:
Preferred stock, $0.50 par value, 700,000 shares authorized (150,000 shares designated as Series A Convertible Redeemable Preferred Stock and 10,000 shares designated as Series C Junior Participating Preferred Stock); none outstanding		—		—
Common stock, $0.001 par value; 15,000,000 shares authorized; 7,826,180 and 7,813,230 shares issued, 7,344,955 and 7,339,578 shares outstanding as of June 30, 2020 and December 31, 2019, respectively		7,826		7,813
Common stock, $0.001 par value; 15,000,000 shares authorized; 7,826,180 and 7,813,230 shares issued, 7,344,955 and 7,339,578 shares outstanding as of September 30, 2020 and December 31, 2019, respectively		7,826		7,813
Additional paid-in capital		40,~~080~~591,~~279~~223		39,355,797
Retained earnings		~~101~~106,~~261~~647,~~129~~736		96,646,527
Treasury stock, 481,225 and 473,652 shares at cost as of June 30, 2020 and December 31, 2019, respectively		(11,931,796)		(11,519,035)
Treasury stock, 481,225 and 473,652 shares at cost as of September 30, 2020 and December 31, 2019, respectively		(11,931,796)		(11,519,035)
Total stockholders' equity		~~129~~135,~~417~~314,~~438~~989		124,491,102
Total liabilities and stockholders’ equity	$	~~133~~137,~~781~~270,~~785~~096	$	126,653,268

See accompanying notes to condensed consolidated financial statements.

Table of Contents

BioSpecifics Technologies Corp.

Condensed Consolidated Income Statements

(unaudited)


	Three Months Ended				~~Six~~Nine Months Ended
	~~June~~September 30,				~~June~~September 30,
	2020		2019		2020		2019
Revenues:
Royalties	$	39,~~903~~255,~~402~~864	$	89,~~852~~442,~~986~~253	$	1322,~~572~~827,~~069~~933	$	1626,~~982~~424,~~127~~380
Total Revenues		3,903,402		8,852,986		13,572,069		16,982,127
License revenues		2,000,000		—		2,000,000		—
Total revenues		11,255,864		9,442,253		24,827,933		26,424,380

Costs and expenses:
Research and development		~~160~~179,~~461~~450		~~161~~143,~~321~~185		~~282~~461,~~431~~881		~~310~~454,~~857~~042
General and administrative		3,~~993~~064,~~861~~484		1,~~728~~978,~~125~~078		710,~~161~~226,~~907~~391		46,~~635~~613,~~284~~362
Milestone fee		1,500,000		—		1,500,000		—
Restructuring charges		—		—		1,146,045		—
Total Costs and Expenses		4,154,322		1,889,446		8,590,383		4,946,141
Total costs and expenses		4,743,934		2,121,263		13,334,317		7,067,404
Operating income		~~(250~~6,~~920)~~511,930		67,~~963~~320,~~540~~990		411,~~981~~493,~~686~~616		1219,~~035~~356,~~986~~976

Other income:
Interest income		~~390~~264,~~888~~641		~~517~~504,~~156~~909		~~870~~1,~~597~~135,238		~~966~~1,~~580~~471,489

Income before income tax expense		~~139~~6,~~968~~776,571		7,~~480~~825,~~696~~899		512,~~852~~628,~~283~~854		1320,~~002~~828,~~566~~465
Provision for income tax expense		(241,~~172~~389,964)		(1,~~054~~552,~~236~~966)		(12,~~237~~627,~~681~~645)		(23,~~159~~712,~~511~~477)
Net income	$	~~115~~5,~~796~~386,607	$	6,~~426~~272,~~460~~933	$	410,~~614~~001,~~602~~209	$	1017,~~843~~115,~~055~~988

Basic net income per share	$	0.0273	$	0.8886	$	01.6336	$	12.4934
Diluted net income per share	$	0.0273	$	0.8785	$	01.6336	$	12.4833

Shares used in computation of basic net income per share		7,~~337~~344,~~460~~955		7,~~308~~334,~~268~~212		7,~~337~~340,~~564~~046		7,~~292~~306,~~663~~665
Shares used in computation of diluted net income per share		7,~~361~~366,~~764~~768		7,~~349~~359,~~696~~034		7,~~361~~363,~~256~~373		7,~~344~~347,~~008~~701

See accompanying notes to condensed consolidated financial statements.

Table of Contents

BioSpecifics Technologies Corp.

Condensed Consolidated Statements of Stockholders’ Equity


				Additional						Stockholders’
	Common Stock			Paid in		Retained		Treasury		Equity
	Shares	Amount		Capital		Earnings		Stock		Total
Balances - December 31, 2019	7,813,230	$	7,813	$	39,355,797	$	96,646,527	$	(11,519,035)	$	124,491,102
Issuance of common stock upon vesting of restricted stock units	11,450		11		(11)		—		—		—
Issuance of common stock upon stock option exercise	1,500		2		61,723		—		—		61,725
Stock compensation expense	—		—		~~662~~1,~~770~~173,714		—		—		~~662~~1,~~770~~173,714
Repurchases of common stock	—		—		—		—		(412,761)		(412,761)
Net income	—		—		—		410,~~614~~001,~~602~~209		—		410,~~614~~001,~~602~~209
Balances - June 30, 2020	7,826,180	$	7,826	$	40,080,279	$	101,261,129	$	(11,931,796)	$	129,417,438
Balances - September 30, 2020	7,826,180	$	7,826	$	40,591,223	$	106,647,736	$	(11,931,796)	$	135,314,989


				Additional						Stockholders’
	Common Stock			Paid in		Retained		Treasury		Equity
	Shares	Amount		Capital		Earnings		Stock		Total
Balances - March 31, 2020	7,815,230	$	7,815	$	39,856,101	$	101,145,333	$	(11,740,066)	$	129,269,183
Balances - June 30, 2020	7,826,180	$	7,826	$	40,080,279	$	101,261,129	$	(11,931,796)	$	129,417,438
Issuance of common stock upon vesting of restricted stock units	9,450		9		(9)		—		—		—
Stock compensation expense	—		—		510,944		—		—		510,944
Issuance of common stock upon stock option exercise	1,500		2		61,723		—		—		61,725
Net income	—		—		—		5,386,607		—		5,386,607
Stock compensation expense	—		—		162,464		—		—		162,464
Balances - September 30, 2020	7,826,180	$	7,826	$	40,591,223	$	106,647,736	$	(11,931,796)	$	135,314,989
Repurchases of common stock	—		—		—		—		(191,730)		(191,730)
Net income	—		—		—		115,796		—		115,796
Balances - June 30, 2020	7,826,180	$	7,826	$	40,080,279	$	101,261,129	$	(11,931,796)	$	129,417,438


				Additional						Stockholders’
	Common Stock			Paid in		Retained		Treasury		Equity
	Shares	Amount		Capital		Earnings		Stock		Total
Balances - December 31, 2018	7,738,167	$	7,738	$	36,302,446	$	72,176,719	$	(10,898,383)	$	97,588,520
Issuance of common stock upon stock option exercise	5873,063		5873		12,~~736~~133,~~888~~323		—		—		12,~~736~~133,~~946~~396
Stock compensation expense	—		—		~~260~~520,~~466~~387		—		—		~~260~~520,~~466~~387
Repurchases of common stock	—		—		—		—		(~~118~~357,~~566~~289)		(~~118~~357,~~566~~289)
Net income	—		—		—		1017,~~843~~115,~~055~~988		—		1017,~~843~~115,~~055~~988
Balances - June 30, 2019	7,796,230	$	7,796	$	38,299,800	$	83,019,774	$	(11,016,949)	$	110,310,421
Balances - September 30, 2019	7,811,230	$	7,811	$	38,956,156	$	89,292,707	$	(11,255,672)	$	117,001,002

Table of Contents


				Additional						Stockholders’
	Common Stock			Paid in		Retained		Treasury		Equity
	Shares	Amount		Capital		Earnings		Stock		Total
Balances - March 31, 2019	7,740,167	$	7,740	$	36,502,652	$	76,593,314	$	(10,898,383)	$	102,205,323
Balances - June 30, 2019	7,796,230	$	7,796	$	38,299,800	$	83,019,774	$	(11,016,949)	$	110,310,421
Issuance of common stock upon stock option exercise	5615,~~063~~000		5615		1396,~~678,470~~435		—		—		1396,~~678,526~~450
Stock compensation expense	—		—		~~118~~259,~~678~~921		—		—		~~118~~259,~~678~~921
Repurchases of common stock	—		—		—		—		(~~118~~238,~~566~~723)		(~~118~~238,~~566~~723)
Net income	—		—		—		6,~~426~~272,~~460~~933		—		6,~~426~~272,~~460~~933
Balances - June 30, 2019	7,796,230	$	7,796	$	38,299,800	$	83,019,774	$	(11,016,949)	$	110,310,421
Balances - September 30, 2019	7,811,230	$	7,811	$	38,956,156	$	89,292,707	$	(11,255,672)	$	117,001,002

See accompanying notes to condensed consolidated financial statements.

Table of Contents

BioSpecifics Technologies Corp.

Condensed Consolidated Statements of Cash Flows

(unaudited)


	~~Six~~Nine Months Ended
	~~June~~September 30,
	2020		2019
Cash flows from operating activities:
Net income	$	410,~~614~~001,~~602~~209	$	1017,~~843~~115,~~055~~988
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4570,~~919~~037		~~228~~256,~~135~~610
Stock-based compensation expense		~~662~~1,~~770~~173,714		~~260~~520,~~466~~387
Deferred tax expense (benefit)		(~~176~~265,~~802~~203)		~~159~~199,~~459~~908
Non-cash lease expense		3857,~~263~~708		—
(Accretion) amortization of bond (discount) premium		~~370~~790,~~193~~006		(7753,~~499~~735)
Changes in operating assets and liabilities:
Accounts receivable		75,~~369~~472,~~321~~278		(~~210~~1,~~949~~250,070)
Income tax payable		1(354,~~318,067~~984)		~~173~~(949,~~690~~791)
Prepaid expenses and other assets		(~~477~~915,~~091~~142)		(~~365~~189,~~423~~959)
Patent costs		—		(92189,~~582~~704)
Accounts payable, accrued expenses and lease obligation		1413,~~060,916~~127		(1921,~~087,775~~360)
Net cash provided by operating activities		1416,~~826~~442,~~158~~750		914,~~830~~538,~~577~~274

Cash flows from investing activities:
Purchases of property and equipment		(69,470)		—
Maturities of marketable investments		6087,~~592~~283,693		4276,~~451~~636,~~229~~059
Purchases of marketable investments		(63105,~~126~~431,~~006~~394)		(5393,~~104~~357,~~080~~599)
Net cash used in investing activities		(218,~~602~~217,~~783~~171)		(1016,~~652~~721,~~851~~540)

Cash flows from financing activities:
Proceeds from stock option exercises		61,725		12,~~736~~133,~~946~~396
Payments for repurchase of common stock		(412,761)		(~~118~~357,~~566~~289)
Net cash (used in) provided by financing activities		(351,036)		1,~~618~~776,~~380~~107

Increase in cash and cash equivalents		11,872,339		796,106
Decrease in cash and cash equivalents		(2,125,457)		(407,159)
Cash and cash equivalents at beginning of year		4,999,183		13,176,452
Cash and cash equivalents at end of period	$	162,~~871~~873,~~522~~726	$	1312,~~972~~769,~~558~~293

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Taxes	$	~~124~~3,~~256~~473,278	$	14,~~826~~462,362

See accompanying notes to condensed consolidated financial statements.

Table of Contents

BIOSPECIFICS TECHNOLOGIES CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~June~~September 30, 2020

(Unaudited)

1.	ORGANIZATION AND DESCRIPTION OF BUSINESS

We are a biopharmaceutical company involved in the development of an injectable collagenase clostridium histolyticum (“CCH”) for multiple indications. We maintain intellectual property with respect to injectable CCH that treats, among other indications, Dupuytren’s contracture (“DC”), Peyronie’s disease (“PD”), cellulite, frozen shoulder syndrome, plantar fibromatosis, and uterine fibroids. Injectable CCH currently is approved and marketed in the U.S. under the trademark XIAFLEX® for the treatment of both DC and PD. We generate revenue primarily from our license agreement with Endo, under which we receive license, sublicense income, royalties, milestones, and mark-up on cost of goods sold payments related to the sale, regulatory submissions, and approval of XIAFLEX®.

Endo has filed a biologics license application for CCH for the treatment of cellulite with the FDA. On July 6, 2020, Endo announced that it received FDA approval of Qwo™ (collagenase clostridium histolyticum-aaes) for the treatment of moderate to severe cellulite in the buttocks of adult women. Endo anticipates Qwo™ to be available commercially in the U.S. starting in ~~the~~spring ~~first~~2021. ~~half~~In ofJuly ~~2021.~~2020, Endo dosed the first patient in a clinical trial in plantar fibromatosis in June 2020 and adhesive capsulitis, also known as frozen shoulder~~, in July 2020~~. Adhesive capsulitis is an inflammation and thickening of the shoulder capsule due to collagen, which causes decreased motion in the shoulder. Plantar fibromatosis is a non-malignant thickening of the feet’s deep connective tissue or fascia. There are currently no FDA-approved pharmaceutical therapies available to treat either condition.

We have developed injectable CCH for 12 clinical indications to date. Under our license agreement with Endo, Endo has the right to further develop CCH for frozen shoulder and plantar fibromatosis, as well as certain other licensed indications. Endo has a right to opt-in for use of CCH in the treatment of uterine fibroids.

On August 31, 2011, we entered into the Second Amended and Restated Development and License Agreement (as amended, the “License Agreement”) with Auxilium Pharmaceuticals, Inc. (“Auxilium”), an entity that was acquired by Endo in 2015. The License Agreement originally was entered into in June 2004 to obtain exclusive worldwide rights to develop, market, and sell certain products containing our enzyme CCH, which Endo markets for approved indications under the trademark XIAFLEX®. Endo’s licensed rights concern the development and commercialization of products, other than dermal formulations labeled for topical administration. Currently, Endo’s licensed rights cover the indications of DC, PD, cellulite, frozen shoulder, plantar fibromatosis, and other potential indications. We and Endo may further expand the License Agreement to cover other indications as they are developed.

On February 26, 2019, we entered into the Second Amendment to the Second Amended and Restated Development and License Agreement (the “Second Amendment”) (effective as of January 1, 2019) to amend certain provisions of the License Agreement to, among other things, require Endo to provide timely estimates of royalties to assist us in complying with our financial reporting obligations. Pursuant to the terms of the Second Amendment, we have consented to the assignment of the License Agreement by Endo Global Ventures to Endo Global Aesthetics Limited, an Irish private company and an affiliate of Endo Global Ventures that is indirectly wholly-owned by Endo.

Under the License Agreement, Endo is responsible, at its own cost and expense, for developing the formulation and finished dosage form of products and arranging for the clinical supply of products. Endo has the option to license development and marketing rights to these indications based on a full analysis of the data from the clinical trials, which would transfer responsibility for the future development costs to Endo and trigger opt-in payments and potential future milestone and royalty payments to us.

The License Agreement extends, on a country-by-country and product-by-product basis, for the longer of the patent life, the expiration of any regulatory exclusivity period or twelve years from the effective date. Either party may terminate the License Agreement as a result of the other party’s breach or bankruptcy.

Endo must pay us on a country-by-country and product-by-product basis a specified percentage, which typically is in the low double digits, of net sales for products covered by the License Agreement. This royalty applies to net sales by Endo or its sublicensees. Endo also is obligated to pay a percentage of any future regulatory or commercial milestone payments received from such sublicensees. In addition, Endo and its affiliates pay us an amount equal to a specified mark-up on

Table of Contents

certain cost of goods related to supply of XIAFLEX® (which mark-up is capped at a specified percentage of the cost of goods of XIAFLEX®) for products sold by Endo and its affiliates.

Endo ~~had~~ previously collaborated with partners to commercialize XIAFLEX® and Xiapex® outside of the United States; however, Endo isterminated ~~in the process of terminating~~ third party partnership agreements for markets outside of the United States, which will reduce the amount of royalty revenues received by us. We do not believe that this reduction will have a material effect on our future consolidated statements of operations.

On October 19, 2020, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Endo, and Beta Acquisition Corp., a Delaware corporation and wholly-owned indirect subsidiary of Endo (“Purchaser”). Pursuant to the Merger Agreement, and on the terms and subject to the conditions thereof, Purchaser commenced a tender offer on November 2, 2020 (the “Offer”) to acquire all of the Company’s issued and outstanding shares of common stock (the “Company Shares”) at a purchase price of $88.50 per share, net to the holder thereof in cash, subject to reduction for any applicable withholding taxes and without interest. See Note 8 “Subsequent Events” for disclosure relating to the Merger Agreement.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except as detailed below, there have been no material changes to the Company’s significant accounting policies during the ~~six~~nine months ended ~~June~~September 30, 2020, as compared to the significant accounting policies disclosed in Note 2 of the Consolidated Financial Statements in the Company’s 2019 Annual Report.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited, but include all adjustments (consisting only of normal, recurring adjustments) that we consider necessary for a fair presentation of our financial position at such dates and the operating results and cash flows for those periods. Although we believe that the disclosures in our financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reporting.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the risk factors discussed herein and in Part I, Item 1A. Risk Factors in our 2019 Annual Report filed with the SEC on March 16, 2020 and our subsequent filings and reports, including, without limitation, our Quarterly ~~Report~~Reports on Form 10-Q for the ~~quarter~~quarters ended March 31, 2020 and June 30, 2020, and the risk factors included herein.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the BioSpecifics and its subsidiary, Advance Biofactures Corp. All intercompany balances and transactions have been eliminated.

Risks and Uncertainties

We are subject to risks and uncertainties as a result of the global COVID-19 pandemic. While we expect that COVID-19 will impact our business to some degree, the significance and duration of the impact on our business cannot be determined at this time due to numerous uncertainties, including the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and business closures, the effectiveness of actions taken to contain the disease, and other unforeseeable consequences.

Critical Accounting Policies, Estimates and Assumptions

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires the use of management’s estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company makes certain assumptions and estimates for its revenues, income taxes, and third -party royalties. We base our estimates on historical experience, and other relevant data including interim data provided by Endo and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities, and the amount of revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions. For further details, see notes “Revenue Recognition,” “Provision for Income Taxes,” and “Third-Party Royalties.”

Revenue Recognition

Table of Contents

~~obligations~~results inmay ~~the~~differ ~~contract;~~from ~~(iii) determine~~these ~~the~~estimates ~~transaction~~under ~~price;~~different ~~(iv) allocate~~assumptions ~~the~~or ~~transaction~~conditions. ~~price~~For tofurther ~~the~~details, ~~performance~~see ~~obligations~~notes in“Revenue ~~the~~Recognition,” ~~contract;~~“Provision ~~and~~for ~~(v) recognize~~Income ~~revenues~~Taxes,” ~~when~~and ~~(or~~“Third-Party ~~as) we satisfy the performance obligation(s)~~Royalties.”

~~Revenues,~~Revenue ~~and their respective treatment for financial reporting purposes under ASC 606 and our license agreement with Endo, are as follows:~~Recognition

Under Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”), we recognize revenues when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. We recognize revenues following the five step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation(s).

Revenues, and their respective treatment for financial reporting purposes under ASC 606 and our License Agreement with Endo, are as follows:

Royalty / Mark-Up on Cost of Goods Sold

We receive royalty revenues on net sales and mark-up on cost of goods sold revenue in the U.S. under our License Agreement with Endo. These are presented in “Royalties” in our consolidated statements of income. We do not have future performance obligations under this revenue stream. In accordance with ASC 606, we record these revenues based on estimates of the net sales that occurred during the relevant period. The relevant period estimates of these royalties are based on data provided by Endo and analysis of historical royalties and mark-up on cost of goods sold revenue that have been paid to us, adjusted for any changes in facts and circumstances, as appropriate. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known. The royalties payable by Endo to us are subject to set-off for certain patent costs.

Licensing Revenue

We include revenue recognized from upfront licensing, sublicensing, and milestone payments in “License Revenues” in our consolidated statements of income.

The Company recognizes licensing revenues generated through development and/or commercialization agreements. The terms of these agreements typically include payment to the Company of one or more of the following: nonrefundable, upfront license fees; sublicensing; development and commercial milestone payments; development activities; and royalties on net sales of licensed products. Each of these types of payments results in licensing revenues except for revenues from royalties on net sales of licensed products and the mark-up of cost of goods sold revenues which are classified as royalty revenues. Revenue is recognized upon satisfaction of a performance obligation by transferring control of a good or service to the customer.

For each development and/or commercialization agreement that result in revenues, the Company identifies all performance obligations, aside from those that are immaterial, which may include a license to intellectual property and know-how, development activities, and/or transition activities. In order to determine the transaction price, in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required.

If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from nonrefundable, upfront license fees based on the relative standalone selling price prescribed to the license compared to the total value of the arrangement. The revenue is recognized when the license is transferred to the collaborator and the collaborator is able to use and benefit from the license. For licenses that are not distinct from other obligations identified in the arrangement, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. If the combined performance obligation is satisfied over time, the Company applies an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, ~~upfront license fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.~~

Development and Regulatory Milestone Payments

Table of Contents

~~periods.~~upfront ~~The~~license ~~Company records a corresponding contract asset when this conclusion is reached~~fees. ~~Milestone payments that have not been included in the transaction price to date are fully constrained.~~ The Company ~~re-~~evaluates the ~~probability~~measure of ~~achievement~~progress ~~of such development milestones and any related constraint~~ each reporting period. ~~The~~and, ~~Company~~if ~~adjusts its estimate of the total transaction price~~necessary, ~~including~~adjusts the ~~amount~~measure of ~~revenue~~performance ~~that~~and itrelated ~~has~~revenue ~~recorded, if necessary~~recognition.

Development and Regulatory Milestone Payments

Depending on facts and circumstances, the Company may conclude that it is appropriate to include the milestone, representing variable consideration, in the estimated total transaction price, or that it is appropriate to fully constrain the milestone. The Company may include revenues from certain milestones in the total transaction price in a reporting period before the milestone is achieved if the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods. The Company records a corresponding contract asset when this conclusion is reached. Milestone payments that have not been included in the transaction price to date are fully constrained. The Company re-evaluates the probability of achievement of such development milestones and any related constraint each reporting period. The Company adjusts its estimate of the total transaction price, including the amount of revenue that it has recorded, if necessary.

Recent Accounting Pronouncements

Accounting Pronouncements Adopted

We adopted ASU No. 2018-13, Fair Value Measurement - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement as of January 1, 2020. This standard modifies certain disclosure requirements on fair value measurements. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.

Accounting Pronouncements Not Yet Adopted

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the first quarter of fiscal year 2023. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes. This standard removes certain exceptions to the general principles of ASC 740 and improves consistent application of and simplifies U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company is required to adopt this standard starting in the first quarter of fiscal year 2021. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements and related disclosures.

Cash, Cash Equivalents, and Investments

Cash equivalents include only securities having a maturity of 90 days or less at the time of purchase. Investments are stated on an amortized cost basis. The Company limits its credit risk associated with cash, cash equivalents, and investments by placing its investments with banks it believes are highly creditworthy and with highly rated money market funds, certificates of deposit, commercial paper, U.S. government agency bonds, municipal bonds, and corporate bonds. All investments are classified as held to maturity. As of ~~June~~September 30, 2020, and December 31, 2019, the amortized cost of these investments was $~~103~~118.02 million and $100.8 million, respectively. No unrealized gains or losses were recorded in either period.

Fair Value Measurements

Management believes that the carrying amounts of the Company’s financial instruments, including cash, cash equivalents, held-to-maturity investments, accounts receivable, accounts payable, and accrued expenses approximate fair value due to the duration of those instruments. As of ~~June~~September 30, 2020, and December 31, 2019, there were no recorded unrealized gains or losses on our investments as they are classified as held-to-maturity. As of ~~June~~September 30, 2020, and December 31, 2019, amortized cost basis of the investments approximated their fair value. For three and six months June 30, 2020, the net amount included in interest income due to the amortization of bond discounts/premiums was $266,000 and $400,000, respectively. For the three and six months ended June 30, 2019, the net amount included in interest income due to the amortization of bond discounts/premiums was $32,000 and $82,000, respectively. At June 30, 2020 and December 31, 2019, the remaining unamortized net premium / (net discount) was $341,000 and $285,000, respectively.

Table of Contents

The schedule of maturities atas ~~June~~of September 30, 2020 and December 31, 2019 are as follows:


	Maturities as of				Maturities as of
	~~June~~September 30, 2020				December 31, 2019
	1 Year or Less		Greater than 1 Year		1 Year or Less		Greater than 1 Year
Municipal bonds	$	1012,~~468~~596,~~782~~326	$	2,~~292~~512,~~620~~697	$	11,341,249	$	—
Government agency bonds		31,~~415~~158,~~943~~191		3,500,000		11,950,738		6,231,804
US Treasury bonds		6,~~016~~006,~~914~~593		—		—		—
Corporate bonds		5760,~~296~~012,~~635~~228		1327,~~924~~812,~~557~~183		57,321,784		6,675,958
Certificates of deposit		4,~~982~~071,~~510~~401		1497,~~074,101~~018		3,626,147		3,661,262
Total	$	8283,~~180~~844,~~784~~739	$	2034,~~791~~321,~~278~~898	$	84,239,918	$	16,569,024

The authoritative literature for fair value measurements established a three-tier fair value hierarchy, which prioritizes the inputs in measuring fair value. These tiers are as follows: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than the quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs (entity developed assumptions) in which little or no market data exists.

As of ~~June~~September 30, 2020, the Company held certain investments that are required to be measured at fair value on a recurring basis. The following tables present the Company’s fair value hierarchy for these financial assets as of ~~June~~September 30, 2020 and December 31, 2019:

June 30, 2020

Type of Instrument

Fair Value

Level 1

Level 2

Level 3

September 30, 2020

Type of Instrument

Fair Value

Level 1

Level 2

Level 3

Cash equivalents

Institutional Money Market

8253,~~058,112~~460

—

Investments

Certificates of Deposit

64,~~056~~568,~~611~~419

—

Cash equivalents

Municipal Bonds

2,248,333

Investments

Municipal Bonds

15,109,023

—

15,109,023

—

Investments

~~Municipal~~Government Agency Bonds

124,~~761~~658,~~402~~191

—

124,~~761~~658,~~402~~191

—

Investments

~~Government~~US ~~Agency~~Treasury Bonds

6,~~915~~006,~~943~~593

—

6,~~915~~006,~~943~~593

—

Investments

USCorporate ~~Treasury~~ Bonds

687,~~016~~824,~~914~~411

—

687,~~016~~824,~~914~~411

—

Investments

Corporate Bonds

71,221,192

—

71,221,192

—


December 31, 2019	Type of Instrument	Fair Value		Level 1		Level 2		Level 3
Cash equivalents	Institutional Money Market	$	950,658	$	950,658	$	—	$	—
Investments	Certificates of Deposit		7,287,409		7,287,409		—		—
Investments	Municipal Bonds		11,341,249		—		11,341,249		—
Investments	Government Agency Bonds		18,182,542		—		18,182,542		—
Investments	Corporate Bonds		63,997,742		—		63,997,742		—

Table of Contents

Concentration of Credit Risk and Major Customers

The Company maintains investments in FDIC insured certificates of deposits, municipal bonds, and corporate bonds.

The Company is currently dependent on one customer, Endo, which generates almost all the Company’s revenues. For the three- and ~~six~~nine ~~month~~months ~~periods~~ ended ~~June~~September 30, 2020, licensing, sublicensing, milestones, and royalty revenues under the License Agreement with Endo were $311.93 million and $1324.68 million, respectively and for the three and ~~six~~nine months ended ~~June~~September 30, 2019, licensing, sublicensing, milestones and royalty revenues under the License Agreement with Endo were $8.9.4 million and $1726.04 million, respectively.

At ~~June~~September 30, 2020 and December 31, 2019, our accounts receivable balances from Endo were $1113.76 million and $19.1 million, respectively.

Table of Contents

Treasury Stock

The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity. For the ~~six~~ nine months ended ~~June~~September 30, 2020, we repurchased 7,573 shares at an average price of $54.50. For the ~~six~~ nine months ended ~~June~~September 30, 2019, there were 26,~~048~~209 shares repurchased at an average price of $57.8954. The stock repurchase program terminated in May 2020.

Receivables and Doubtful Accounts

Trade accounts receivable are stated at the amount the Company expects to collect. We may maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We consider the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Our accounts receivable balance is typically due from Endo, our single large specialty pharmaceutical customer. Endo has historically paid timely and has been a financially stable organization. Due to the nature of the accounts receivable balance, we believe the risk of doubtful accounts is minimal and therefore no allowance is recorded. If the financial condition of Endo were to deteriorate, adversely affecting its ability to make payments, additional allowances would be required. We may provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. At ~~June~~September 30, 2020 and December 31, 2019, our accounts receivable balance was $1113.76 million and $19.1 million, respectively, and was from one customer, Endo.

Third-Party Royalties

We have entered into licensing and royalty agreements with third parties and agreed to pay certain royalties on net sales of products for specific indications. The royalty rates differ from agreement to agreement. No assumptions should be made that any disclosed royalty rate payable to a particular third party is the same or similar with respect to any royalty rate payable to any other third parties. We accrue third-party royalty expenses on net sales reported to us by Endo. Third-party royalty costs are generally expensed under general and administrative in the quarter that the net sales have occurred. For the three- and ~~six~~nine ~~month~~months ~~periods~~ ended ~~June~~September 30, 2020, third-party royalty expenses on royalty revenue were $0.12 million and $0.24 million, respectively. For the three and ~~six~~nine ~~month~~months ~~periods~~ ended ~~June~~September 30, 2019, third-party royalty expenses on royalty revenue were $0.2 million and $0.67 million, respectively. AsIn addition, the Company incurred a milestone fee of ~~June~~$1.5 ~~30,~~million ~~2019,~~on welicense ~~have~~revenue noin ~~further~~the third~~-party~~ ~~royalties~~quarter in2020 ~~connection~~upon ~~with~~the PDFDA asapproval of Qwo™ (collagenase clostridium histolyticum-aaes) for the ~~agreement~~treatment ~~has~~of ~~expired~~cellulite.

~~Royalty Buy-Down~~

On March 31, 2012, we entered into an amendment to our existing agreement with Dr. Martin K. Gelbard, dated August 27, 2008, related to our future royalty obligations in connection with PD. The amendment enables us to buy down a portion of our future royalty obligations in exchange for an initial cash payment of $1.5 million and five additional cash payments of $600,000, all of which have been paid as of January 1, 2018. Royalty obligations terminated five years after the first commercial sale, which occurred in January 2014. Accordingly, we ceased paying royalties in February 2019. The Company amortizes long-term contracts with finite lives in a manner that reflects the pattern in which the economic benefits of the assets are consumed or otherwise used up. Dr. Gelbard’s agreement is amortized based on an income

Table of Contents

forecast method by estimating sales of XIAFLEX® and Xiapex® for PD on an annual basis as measured by the proportion of the total estimated sales over the five year period. For the three and six months ended June 30, 2019 we amortized zero and $0.2 million related to this agreement, respectively, related to this agreement and is recorded as part of general and administrative expenses. As of both June 30, 2020 and December 31, 2019, there were no remaining capitalized balances outstanding related to this agreement.

Research and Development Expenses

R&D expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expense, facility costs, and overhead. R&D expenses also consist of third-party costs, such as medical professional fees, product costs used in clinical trials, consulting fees, and costs associated with clinical study arrangements. We may fund R&D at medical research institutions under agreements that are generally cancelable. All of these costs are charged to R&D as incurred, which may be measured by percentage of completion, contract milestones, patient enrollment, or the passage of time.

Clinical Trial Expenses

Our cost accruals for clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with various clinical trial centers and clinical research organizations. In the normal course of business, we contract with third parties to perform various clinical trial activities in the ongoing development of potential drugs. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events, the successful enrollment of patients, the completion of portions of the clinical trial, or similar conditions. The objective of our accrual policy is to match the recording of expenses in our financial statements to the actual cost of services received and efforts expended. As such, expenses related to each patient enrolled in a clinical trial are recognized beginning upon entry into the trial and over the course of the patient’s continued participation in the trial. In the event of early termination of a clinical trial, we accrue an amount based on our estimate of the remaining non-cancelable obligations associated with the winding ~~down of the clinical trial. Our estimates and assumptions could differ significantly from the amounts that may actually be incurred.~~

Table of Contents

down of the clinical trial. Our estimates and assumptions could differ significantly from the amounts that may actually be incurred.

Stock-Based Compensation

ASC 718, Compensation - Stock Compensation (“ASC 718”), requires the recognition of compensation expense, using a fair-value based method, for costs related to all stock awards including stock options and common stock issued to our employees and directors under our stock plans. ASC 718 requires companies to estimate the fair value of stock option awards on the date of grant using an option-pricing model. The fair value of each service-based restricted stock unit granted is estimated on the day of grant based on the closing price of the Company’s common stock. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods in our condensed consolidated statements of operations. The Company recognizes forfeitures as they occur by reversing compensation cost previously recognized for an award that is forfeited because of a failure to satisfy a service condition in the period of the forfeiture.

Under the Company’s 2019 Omnibus Incentive Compensation Plan (the “Plan”), grants to employees, key advisors, on non-employee directors may consist of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards, or cash awards. As of ~~June~~September 30, 2020, options to purchase ~~232~~242,187 shares of common stock and 412,~~036~~666 restricted stock awards were outstanding under the Plan, and a total of 1,~~098~~079,~~612~~982 shares remained available for grant under the Plan. Grants under the Plan vest over periods ranging from one to four years and expire ten years from date of grant.

Table of Contents

2019 Omnibus Incentive Compensation Plan (2019 Plan)

Restricted Stock Awards

A summary of the restricted stock awards activity during the ~~six~~ nine months ended ~~June~~September 30, 2020 is presented below:


		Weighted-
		Average Grant
		Date Fair Value
	Restricted Stock	Per Share
Nonvested at December 31, 2019	10,450	$	60.47
Issued	513,~~036~~666		5562.7162
Vested	(11,450)		59.60
Forfeited	—		—
Nonvested at June 30, 2020	4,036	$	57.00
Nonvested at September 30, 2020	12,666	$	63.58

Stock-based compensation expense related to restricted stock awards recognized in general and administrative expense was $~~193~~178,000 and $~~337~~515,000 for the three month and ~~six~~nine ~~month~~months ~~periods~~ ended ~~June~~September 30, 2020, respectively, and ~~zero~~$146,000 for both the three and ~~six~~nine ~~month~~months ~~periods~~ ended ~~June~~September 30, 2019~~, respectively~~.

As of ~~June~~September 30, 2020, there was $~~181~~578,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements related to restricted stock. This cost is expected to be recognized over the vesting periods of the restricted stock, with a weighted-average period of 1.00 year.

Stock Option Activity

For the ~~six~~ nine months ended ~~June~~September 30, 2020, we granted a total of ~~182~~202,000 stock options with a weighted average grant date fair value of $61.3792 per share.

~~The assumptions used in the valuation of stock options granted during the six months ended June 30, 2020 were as follows:~~15

Table of Contents

The assumptions used in the valuation of stock options granted during the nine months ended September 30, 2020 were as follows:


	Nine Months Ended	~~Six Months Ended~~
	September 30, 2020	~~June 30, 2020~~
Risk-free interest rate		0.3429% - 1.61%
Expected term of option		5.5 - 6.25 years
Expected stock price volatility		39.5% - 41.5%
Expected dividend yield	$	0.0

A summary of our stock option activity during the ~~six~~ nine months ended ~~June~~September 30, 2020 is presented below:


				Weighted
		Weighted		Average	Aggregate
		Average		Remaining	Intrinsic
	Shares	Exercise Price		Contractual Term	Value
Outstanding at December 31, 2019	189,187	$	46.79	8.62	$	1,920,684
Grants	~~182~~202,000		61.3792	—		—
Exercised	(1,500)		41.15	—		—
Forfeited	(~~137~~147,500)		5556.7951	—		—
Outstanding at June 30, 2020	232,187	$	56.02	8.12	$	1,222,261
Outstanding at September 30, 2020	242,187	$	56.49	8.35	$	—
Exercisable at June 30, 2020	52,687	$	39.70	2.50	$	1,136,761
Exercisable at September 30, 2020	42,687	$	33.45	2.77	$	827,256

During the ~~six-month~~nine ~~periods~~months ended ~~June~~September 30, 2020 and 2019, the Company received $0.1 million and $12.71 million, respectively, from stock options exercised by option holders.

Aggregate intrinsic value represents the total pre-tax intrinsic value based on the closing price of our common stock of $6152.2883 on ~~June~~September 30, 2020, which would have been received by the option holders had all option holders exercised their options as of that date. We have $4.34 million in unrecognized compensation cost related to stock options outstanding as of ~~June~~September 30, 2020, which we expect to recognize over the next 8.135 years.

16Stock-based compensation expense related to stock options recognized in general and administrative expenses was $333,000 for the three months ended September 30, 2020 and $469,000 for the nine months ended September 30, 2020, and $114,000 and $374,000 for the three and nine months ended September 30, 2019, respectively. Stock compensation expense related to restructuring associated with the acceleration of vesting of certain stock options and restricted stock units was $190,000 for the nine months ended September 30, 2020 (see Note 7).

Table of Contents

Stock-based compensation expense related to stock options recognized in general and administrative expenses was a credit of $31,000 for the three months ended June 30, 2020 and $136,000 for the six month period ended June 30, 2020, and $119,000 and $260,000 for the three and six month periods ended June 30, 2019, respectively. The credit for the three months ended June 30, 2020 was the result of the reversal of $200,000 of previously recognized stock compensation expense due to forfeitures that occurred during the period. In addition, stock compensation expense related to restructuring associated with the acceleration of vesting of certain stock options and restricted stock units was $190,000 for the three months ended March 31, 2020 (see Note 7).

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Machinery and equipment, furniture and fixtures, and autos are depreciated on a straight-line basis over their estimated useful lives of five to ten years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining life of the lease. At ~~June~~September 30, 2020, total gross property and equipment consisted of furniture and fixtures of $6569,000 with an expected useful life of five years. ~~At December 31, 2019, all property and equipment were fully depreciated.~~

Comprehensive Income

For each of the three and ~~six-month~~nine ~~periods~~months ended ~~June~~September 30, 2020 and 2019, we had no components of other comprehensive income other than net income itself.

Provision for Income Taxes

We use the asset and liability method of accounting for income taxes, as set forth in ASC 740-10-25-2. Under this method, deferred income taxes, when required, are provided on the basis of the difference between the financial reporting and income tax basis of assets and liabilities at the statutory rates enacted for future periods when the differences are expected to reverse. A valuation allowance is applied against any net deferred tax asset if, based on the weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon the ultimate settlement. As of June 30, 2020 and December 31, 2019, the Company has not recorded any unrecognized tax benefits. We classify interest associated with income taxes under interest expense and tax penalties under other.16

Table of Contents

The Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon the ultimate settlement. As of September 30, 2020 and December 31, 2019, the Company has not recorded any unrecognized tax benefits. We classify interest associated with income taxes under interest expense and tax penalties under other.

Commitments and Contingencies

We determine if an arrangement includes a lease at inception. Right-of-use lease assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The right-of-use lease asset includes any lease payments made and excludes lease incentives. Incremental borrowing rate is used in determining the present value of future payments. We apply a portfolio approach to the property leases to apply an incremental borrowing rate to leases with similar lease terms. The lease terms may include options to extend or terminate the lease. We recognize the options to extend the lease as part of the right-of-use lease assets and lease liabilities only if it is reasonably certain that the option would be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the non-cancelable lease term. The adoption of the new standard as of January 1, 2019 did not have a material impact on our consolidated financial statements for the ~~six~~ nine months ended ~~June~~September 30, 2019 due to the short-term nature of our then-existing lease in Lynbrook, New York.

In December 2019, we recorded a right-of-use lease asset of $243,000, a short-term lease liability of $76,000, and a long-term lease liability of $167,000 associated with the lease of our new headquarters in Wilmington, Delaware.

17The following table summarizes the maturity of the Company’s lease obligations on an undiscounted cash flow basis and a reconciliation to the operating lease liabilities recognized on our balance sheet as of September 30, 2020 and December 31, 2019:

Table of Contents

The following table summarizes the maturity of the Company’s lease obligations on an undiscounted cash flow basis and a reconciliation to the operating lease liabilities recognized on our balance sheet as of June 30, 2020 and December 31, 2019:


	~~June~~September 30, 2020		December 31, 2019
2020	$	4120,~~210~~605	$	75,352
2021		84,893		84,893
2022		87,428		87,428
Total lease payments		~~213~~192,~~531~~926		247,673
Less: interest		(86,~~149~~656)		(11,560)
Total lease obligation	$	~~205~~186,~~382~~270	$	236,113

On January 7, 2020, the Company provided three months’ notice to 35 Wilbur Street Associates, LLC of the Company’s intent to terminate the lease agreement for our former corporate headquarters, located at 35 Wilbur St., Lynbrook, New York 11563. Accordingly, the lease terminated on April 7, 2020. As the lease provided the Company the option to cancel the lease by giving three months’ prior written notice, the Company did not incur any termination penalties.

Total operating lease expenses amounted to $2321,000 and $80101,000 for the three and ~~six~~nine ~~month~~months ~~period~~ ended ~~June~~September 30, 2020 and $34,000 and $67101,000 for the three and ~~six~~nine months ~~period~~ ended ~~June~~September 30, 2019, respectively.

~~The recent outbreak of the novel coronavirus (COVID-19) resulted in a decrease in revenues of 53% from the second quarter of 2020 as compared to the second quarter of 2019.~~ Since XIAFLEX® is used primarily in elective procedures, which have been curtailed during the outbreak, and based on public statements made by Endo, the Company believes that the COVID-19 outbreak may have a material adverse effect on its business and financial results until the easing of the restrictions that have been imposed as a result of the outbreak.

On June 12, 2020, the Company filed an arbitration demand against the Research Foundation of the State University of New York for and on behalf of Stony Brook University (“Research Foundation”) seeking a declaration that one of its former employees is a co-inventor of the Research Foundation’s patent for the treatment of cellulite (U.S. Patent No. 10,123,959, which has an expiration date of February 7, 2027), and challenging the Research Foundation’s prospective rights to royalties under the Cellulite License Agreement dated August 23, 2007, which is described in the Company’s most recent annual report on Form 10-K. This is a private and confidential arbitration administered by the American Arbitration Association. On July 9, 2020, the Research Foundation filed a response, denying the allegations of the demand and making a counterclaim alleging principally that the Company is in breach of its obligations under the Cellulite License Agreement. The Company has responded to the counterclaim, denying the allegations and requesting judgment in its favor on all claims. However, should the Research Foundation prevail in this arbitration, it could have a material adverse effect on the Company’s future financial results. ~~See “Subsequent Events” (Note 8) for disclosure concerning FDA approval and postponement of commercial launch of the cellulite indication.~~

Table of Contents

See Note 8 “Subsequent Events” for disclosure regarding litigation related to the Merger Agreement.

Stockholders’ Equity

At the Company’s annual meeting of stockholders held on June 12, 2020 (the “2020 Annual Meeting”), the stockholders approved an amendment to the Company’s Certificate of Incorporation, as amended, to increase the authorized number of shares of common stock from 10,000,000 shares to 15,000,000 shares.

On April 10, 2020, the Board approved an amendment to the Company's Rights Agreement, dated as of May 14, 2002 and amended June 19, 2003, February 3, 2011, March 5, 2014, May 27, 2016, and May 11, 2018 (the “Original Rights Agreement”), by and between the Company and Worldwide Stock Transfer, LLC (successor in interest to OTC Corporate Transfer Service Company), as rights agent (the “Rights Agent”). The amendment, which was subsequently executed on that date by the Company and the Original Rights Agent, changes the Final Expiration Date (as defined in the Original Rights Agreement) of the rights under the Original Rights Agreement (the “Original Rights”) from the close of business on May 31, 2020 to the close of business on April 10, 2020. As a result, the Original Rights have expired, and the Original Rights Agreement terminated.

Table of Contents

Also, on April 10, 2020, the Board approved and adopted a Rights Agreement, dated as of April 10, 2020 (the “Rights Agreement”), by and between the Company and the Rights Agent. Pursuant to the Rights Agreement, the Board declared a dividend of one preferred share purchase right (each, a “Right”) for each outstanding share of common stock, par value $0.001, of the Company (each, a “Common Share" and, collectively, the “Common Shares”). The Rights are distributable to stockholders of record as of the close of business on April 21, 2020 (the “Record Date”). One Right also will be issued together with each Common Share issued by the Company after April 21, 2020, but before the Distribution Date (as defined in the Rights Agreement) (or the earlier redemption or expiration of the Rights) and, in certain circumstances, after the Distribution Date.

Generally, the Rights Agreement works by causing substantial dilution to any person or group that acquires beneficial ownership of twenty percent (20%) or more of the Common Shares without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. The Rights Agreement is not intended to interfere with any merger, tender or exchange offer or other business combination approved by the Board. The Rights Agreement also does not prevent the Board from considering any offer that it considers to be in the best interest of its stockholders.

A proposal to ratify the adoption by the Board of the Rights Agreement was approved by the stockholders at the Company’s 2020 Annual Meeting.

The Rights Agreement was amended on October 19, 2020; see Note 8 “Subsequent Events” for disclosure relating to the Rights Agreement amendment.

Shelf Registration Statement

On June 26, 2020, we filed a shelf registration statement on Form S-3, which we subsequently amended on July 15, 2020, relating to the sale, from time to time, in one or more transactions, of up to $200,000,000 of common stock, preferred stock, debt securities, warrants, and units (the “Shelf Registration Statement”). ~~NET~~The ~~INCOME~~Shelf ~~PER~~Registration ~~SHARE~~Statement was declared effective on July 17, 2020. As of September 30, 2020, $200,000,000 remained available for issuance under the Shelf Registration Statement. As set forth in the Shelf Registration Statement, the Company expects to use a substantial portion of the net proceeds from the sale of securities under the Shelf Registration Statement for general corporate purposes; the Company, however, has not allocated the net proceeds for any specific purposes.

In accordance with ASC 260, Earnings Per Share, basic net income per share amount is computed using the weighted-average number of shares of common stock outstanding during the periods presented, while diluted net income per share is computed using the sum of the weighted-average number of common and common equivalent shares outstanding. Common equivalent shares used in the computation of diluted earnings per share result from the assumed exercise of stock options and restricted stock awards using the treasury stock method. For the three-and six month periods ended June 30, 2020, there were 24,304 and 23,692, respectively of common equivalent shares attributable to stock options and restricted stock awards that were included in the calculation of diluted net income per share. For the three and six month periods ended June 30, 2019 there were 41,428 and 51,345, respectively, of common equivalent shares attributable to stock options that were included in the calculation of diluted net income per share. There were 186,036 and 198,536 stock options and restricted stock awards excluded from the calculation of diluted net income per share for the three and six month periods ended June 30, 2020, respectively, because their effects are anti-dilutive. There were 63,750 stock options to purchase shares excluded from the calculation of diluted net income per share for the three and six month periods ended June 30, 2019, because their effects are anti-dilutive.

At-The-Market Equity Offering Sales Agreement

On August 31, 2020, the Company entered into an At-The-Market Equity Sales Agreement (the “ATM Agreement”) with Stifel, Nicolaus & Company, Incorporated (“Stifel”) and Oppenheimer & Co. Inc. (“Oppenheimer” and, together with Stifel, the “Agents”) pursuant to which the Company may issue and sell, from time to time, at its option, shares of its common stock, $0.001 par value per share, having an aggregate offering price of up to $75,000,000 (the “ATM Shares”) through the Agents, as its sales agents.

Table of Contents

Subject to the terms and conditions of the ATM Agreement, the Agents will use their commercially reasonable efforts to sell the ATM Shares from time to time, based upon the Company’s instructions, by methods deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act of 1933, as amended (the “Securities Act”). The Company has agreed to pay the Agents’ commissions for their services in acting as the Company’s agents in the sale of the ATM Shares in the amount of 3.0% of gross proceeds from the sale of the ATM Shares pursuant to the ATM Agreement. The Company also has agreed to provide the Agents with customary indemnification and contribution rights. The offering of the ATM Shares will terminate upon the earliest of (a) the sale of the maximum number or amount of the ATM Shares permitted to be sold under the ATM Agreement and (b) the termination of the ATM Agreement by the parties thereto.

During the third quarter, the Company did not make any sales under the ATM Agreement.

3.	NET INCOME PER SHARE

In accordance with ASC 260, Earnings Per Share, basic net income per share amount is computed using the weighted-average number of shares of common stock outstanding during the periods presented, while diluted net income per share is computed using the sum of the weighted-average number of common and common equivalent shares outstanding. Common equivalent shares used in the computation of diluted earnings per share result from the assumed exercise of stock options and restricted stock awards using the treasury stock method. For the three and nine months ended September 30, 2020, there were 21,813 and 23,327, respectively, of common equivalent shares attributable to stock options and restricted stock awards that were included in the calculation of diluted net income per share. For the three and nine months ended September 30, 2019 there were 24,822 and 41,036, respectively, of common equivalent shares attributable to stock options and restricted stock awards that were included in the calculation of diluted net income per share. There were 200,630 and 176,389 stock options and restricted stock awards excluded from the calculation of diluted net income per share for the three and nine months ended September 30, 2020, respectively, because their effects are anti-dilutive. There were 60,500 and 60,000 stock options and restricted stock awards to purchase shares excluded from the calculation of diluted net income per share for the three and nine months ended September 30, 2019, respectively, because their effects are anti-dilutive.

4.	ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:


	~~June~~September 30,		December 31,
	2020		2019
Trade accounts payable	$	~~346~~98,~~270~~665	$	197,077
Accrued legal and other professional fees		~~883~~526,~~069~~099		330,787
Accrued payroll, severance, and related costs		~~638~~591,~~089~~116		209,330
Third-party royalties		62156,000		228,000
Restructuring accrual		5910,~~678~~000		—
Other accruals		~~100~~79,~~950~~500		33,215
Total	$	21,~~090~~461,~~056~~380	$	998,409

5. PATENT COSTS

We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging from two to ten years, and review for impairment on a quarterly basis and when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. As of September 30, 2020 and December 31, 2019, no impairment existed, and no adjustments were warranted.

Table of Contents

5No costs were capitalized during the three and nine months ended September 30, 2020, as compared to $97,000 and $190,000 for three and nine months ended September 30, 2019, respectively. ~~PATENT~~Patent ~~COSTS~~costs may be creditable against future royalty revenues. For each period presented below, net patent costs consisted of:

We amortize intangible assets with definite lives on a straight-line basis over their estimated useful lives, ranging from two to ten years, and review for impairment on a quarterly basis and when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. As of June 30, 2020 and December 31, 2019, no impairment existed, and no adjustments were warranted.

No costs were capitalized for the three and six months ended June 30, 2020, as compared to $93,000 for three and six months ended June 30, 2019, respectively. Patent costs may be creditable against future royalty revenues. For each period presented below, net patent costs consisted of:


	~~June~~September 30,		December 31,
	2020		2019
Patents	$	1,272,625	$	1,272,625
Accumulated amortization		(~~740~~761,~~636~~280)		(699,348)
	$	~~531~~511,~~989~~345	$	573,277

The amortization expense for patents for the three and ~~six~~nine months ended ~~June~~September 30, 2020 was $2021,000 and $4162,000 respectively, and for the three and ~~six~~nine months ended ~~June~~September 30, 2019 was $2429,000 and $4372,000, respectively. The ~~estimated~~ aggregate amortization expense for the remaining ~~six~~ three months of 2020 and each of the years below is as follows:


July 1, 2020 – December 31, 2020	$	41,300
October 1, 2020 – December 31, 2020	$	20,644
2021		65,~~400~~427
2022		65,~~400~~427
2023		65,~~400~~427
2024		65,~~400~~427
Thereafter		~~229~~228,~~100~~993

6.PROVISION FOR INCOME TAXES

Our deferred tax liabilities and deferred tax assets are impacted by events and transactions arising in the ordinary course of business, R&D activities, vesting of nonqualified options and other items. The provision for income taxes is based on an estimated effective tax rate derived from our consolidated earnings before taxes, adjusted for nondeductible expenses and other permanent differences for the fiscal year. The provision for income taxes for the three and ~~six~~nine ~~month~~months ~~periods~~ ended ~~June~~ September 30, 2020 was $~~24,000~~1.4 million and $1.2.6 million, respectively, and for the three and ~~six~~nine ~~month~~months ~~periods~~ ended ~~June~~September 3130, 2019 was $1.16 million and $23.27 million, respectively. As of ~~June~~ September 30, 2020 and December 31, 2019, our net deferred tax liabilities were $0.43 and $0.6 million, respectively.

The estimated effective tax rate for both the three and ~~six~~nine months ended ~~June~~September 30, 2020 was ~~17% and~~ 21%, ~~respectively,~~ of pre-tax income reported in the period, calculated based on the estimated annual effective rate anticipated for the year ending December 31, 2020 plus the effects, if any, of certain discrete items occurring in 2020.

The estimated effective tax rate for the three and ~~six~~nine months ended ~~June~~September 30, 2019 was 1420% and 1718%, respectively, of pre-tax income reported in the period, calculated based on the estimated annual effective rate anticipated for the year ending December 31, 2019 plus the effects, if any, of certain discrete items occurring in 2019.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act made various tax law changes including, among other things, (i) increasing the limitation under IRC Section 163(j) for 2019 and 2020 to permit additional expensing of interest, (ii) enacting a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k) and (iii) making modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid taxes. The income tax provisions of the CARES Act had limited applicability to the Company as of ~~June~~September 30, 2020, and therefore, the enactment of the CARES Act did not have a material impact on the Company’s consolidated financial statements as of, and for the three and ~~six~~nine months ended, ~~June~~September 30, 2020. We will continue to evaluate the impact of tax legislation and will update our disclosures as additional information and interpretative guidance becomes available.

7.	RESTRUCTURING AND SEPARATION COSTS

Table of Contents

7.2020, ~~RESTRUCTURING~~the ~~AND~~five ~~SEPARATION~~employees ~~COSTS~~and one consultant were given separation agreements detailing the termination benefits to which they would be entitled.

OnAs ~~January 7,~~a ~~2020~~result, we ~~announced~~recorded ~~that~~a weone-time ~~would~~restructuring becharge ~~relocating~~of ~~our~~$1.1 ~~corporate~~million ~~headquarters~~in ~~from~~the ~~Lynbrook,~~first ~~New~~quarter ~~York~~of fiscal 2020. The restructuring charge is associated with $0.9 million of one-time termination benefits that we expect to ~~Wilmington,~~pay ~~Delaware~~out asin cash over a period of ~~April 7,~~nine ~~2020~~months and $0.2 Onmillion ~~January 6,~~of ~~2020,~~one-time innon-cash ~~connection~~termination expenses associated with ~~this~~the ~~relocation,~~acceleration weof ~~notified~~vesting ~~five~~of ~~employees~~certain stock options and ~~one~~restricted ~~consultant~~stock ~~that~~units. ~~their~~The ~~services~~estimated ~~would~~liability nofor ~~longer~~termination bebenefits ~~required~~was ~~effective~~recorded ~~March 31,~~at fair value during the first quarter of 2020 as a current liability in the consolidated balance sheet. OnThese ~~March 23,~~termination ~~2020~~benefits consist of severance payments, ~~the~~reimbursement ~~five~~of ~~employees~~benefits payments, and ~~one~~guaranteed ~~consultant~~consulting ~~were~~payments. ~~given~~Total ~~separation~~charges ~~agreements~~and ~~detailing~~payments related to the ~~termination~~restructuring ~~benefits~~plan torecognized ~~which~~in ~~they~~the ~~would~~consolidated bestatement ~~entitled.~~of operations are as follows:

As a result, we recorded a one-time restructuring charge of $1.1 million in the first quarter of fiscal 2020. The restructuring charge is associated with $0.9 million of one-time termination benefits that we expect to pay out in cash over a period of six months and $0.2 million of one-time non-cash termination expenses associated with the acceleration of vesting of certain stock options and restricted stock units. The estimated liability for termination benefits was recorded at fair value during the first quarter of 2020 as a current liability in the consolidated balance sheet. These termination benefits consist of severance payments, reimbursement of benefits payments, and guaranteed consulting payments. Total charges and payments related to the restructuring plan recognized in the consolidated statement of operations are as follows:


	~~Six~~Nine Months Ended
	~~June~~September 30,
	2020
Restructuring accrual, January 1, 2020	$	—
Termination costs		1,070,024
Facility exit costs		76,020
Payments		(~~895~~945,~~934~~612)
Stock compensation expense charged to additional paid-in-capital		(190,432)
Restructuring accrual, June 30, 2020	$	59,678
Restructuring accrual, September 30, 2020	$	10,000

On April 6, 2020, the Company and Mr. J. Kevin Buchi mutually agreed that Mr. Buchi would step down as Chief Executive Officer and as a director of the Company, effective immediately. The Company and Mr. Buchi have entered into a separation agreement that details the termination benefits to which he is entitled. The Company recorded zero and $0.6 million in separation costs related to this agreement in general and administrative expenses for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. The remaining accrual of $0.53 million at ~~June~~September 30, 2020 is included in accounts payable and accrued expenses and will be paid out over the next 96 months.

8. SUBSEQUENT EVENTS

OnMerger July 6, the FDA granted approval of the cellulite indication, but Endo has postponed the commercial launch until the first half of 2021, citing the effects of the COVID-19 pandemic on the market for aesthetic treatments. The Company reiterates its policy stated in its most recent annual report on Form 10-K not to announce publicly royalty rates for potential future indications under development before commercialization. It is important to emphasize that in-licensing royalty rates vary from indication to indication and it should not be assumed that the in-licensing royalty rates for potential future indications will be the same as those for currently marketed indications.Agreement

Pursuant to the Merger Agreement, and on the terms and subject to the conditions thereof, Purchaser commenced a tender offer on November 2, 2020 (the “Offer”) to acquire all of the Company’s issued and outstanding shares of common stock (the “Company Shares”) at a purchase price of $88.50 per share, net to the holder thereof in cash, subject to reduction for any applicable withholding taxes and without interest.

The Offer will initially remain open for 20 business days from the date of commencement of the Offer. Under certain circumstances as set forth in the Merger Agreement, Purchaser may be required to extend, or may elect to extend, the Offer on one or more occasions.

Following the consummation of the Offer and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Purchaser will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Endo, pursuant to Section 251(h) of the General Corporation Law of the State of Delaware without a vote of the Company stockholders (the “Merger”). At the effective time of the Merger (the “Effective Time”), and without any action on the part of the holders of any Company Shares, each Company Share, other than any Company Shares (i) owned at the commencement of the Offer and immediately prior to the Effective Time by Parent, Purchaser, or the Company or any direct or indirect wholly-owned subsidiary thereof, (ii) irrevocably accepted for purchase pursuant to the Offer, or (iii) owned by Company stockholders who are entitled to demand and have properly and validly demanded their appraisal rights under Delaware law, will be automatically converted into the right to receive an amount in cash equal to the Offer Price, subject to reduction for any applicable withholding taxes and without interest.

We expect the Merger to be completed in December 2020.

Table of Contents

Schedule 14D-9 and Schedule TO

In connection with the Merger, the Company filed a Solicitation/Recommendation Statement on Schedule 14D-9 (the “Schedule 14D-9”) with the SEC by the Company in connection with the proposed Merger on November 2, 2020. Also on November 2, 2020 and in connection with the Merger, Endo filed a Tender Offer Statement on Schedule TO (the “Schedule TO”).

Amendment to Rights Agreement

21On October 19, 2020, in connection with the execution of the Merger Agreement, the Company and Worldwide Stock Transfer, LLC (the “Rights Agent”) entered into Amendment No. 1 to Rights Agreement (the “Rights Amendment”) to the Rights Agreement, for the purpose of amending the Rights Agreement to render it inapplicable to the Merger Agreement, the execution thereof, and the performance or consummation of the transactions contemplated thereby, including, without limitation, the Merger and the Offer. In particular, the Amendment provides that (i) none of the approval, adoption, execution, delivery, and/or amendment of the Merger Agreement, the public announcement and/or public disclosure by any person of the Merger Agreement or any of the transactions contemplated thereby, including, without limitation, the Merger and the Offer, or the performance and/or consummation of any of the transactions contemplated by the Merger Agreement, including, without limitation, the Merger and the Offer, will result in (A) any of Endo or Purchaser, or any of their respective affiliates or associates, either individually or together, being deemed to be an Acquiring Person, Beneficial Owner of or of Beneficially Owning (each as defined in the Rights Agreement) the Company’s common stock or other securities, (B) the occurrence of a Triggering Event (as defined in the Rights Agreement), (C) the occurrence of a Distribution Date (as defined in the Rights Agreement), (D) the occurrence of a Shares Acquisition Date (as defined in the Rights Agreement), or (E) the occurrence of a Section 11(a)(ii) Event or a Section 13 Event (each as defined in the Rights Agreement), and (ii) if they have not previously expired, the Rights (as defined in the Rights Agreement) expire immediately prior to the Effective Time of the Merger, but only if such Effective Time shall occur.

Litigation related to the Merger

On November 2, 2020, a purported stockholder of Company filed a complaint in the United States District Court for the District of Delaware against Company and its directors, captioned Shiva Stein v. BioSpecifics Technologies Corp., et al., Case No. 1:20-cv-01491-UNA. The complaint names as defendants the Company and each member of the Company’s Board of Directors. The complaint alleges that the Schedule 14D-9 is materially incomplete and contains misleading representations and information in violation of Sections 14(e), 14(d) and 20(a) of the Exchange Act. The complaint seeks, among other things, (a) injunctive relief preventing the defendants from proceeding with, consummating or closing the transactions contemplated by the Merger Agreement, unless and until the defendants disclose certain material information to the Company’s stockholders; (b) rescission, to the extent already implemented, of the Merger Agreement or any of the terms thereof, or rescissory damages; (c) damages resulting from the defendants’ alleged wrongdoing; and (d) an award of costs and disbursements of the complaint, including reasonable attorneys’ fees and expert fees and expenses.

Additional complaints may be filed against the Company, the Company’s Board of Directors, Endo and/or Purchaser in connection with the transactions contemplated by the Merger Agreement, the Schedule TO and the Schedule 14D-9. If such additional complaints are filed, absent new or different allegations that are material, the Company will not necessarily announce such additional complaints.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and is qualified by reference to them.

Overview

We are a biopharmaceutical company involved in the development of an injectable collagenase clostridium histolyticum (“CCH”) for multiple indications. Collagenases are naturally occurring enzymes responsible for the breakdown of collagen, which is the main structural protein in the extracellular matrix in the various connective tissues of the body and is the most abundant protein in mammals. Local accumulations of excess collagen are associated with a number of medical conditions.

We maintain intellectual property with respect to injectable CCH that treats, among other indications, Dupuytren’s contracture (“DC”), Peyronie’s disease (“PD”), cellulite, frozen shoulder syndrome, plantar fibromatosis, and uterine fibroids. Injectable CCH currently is marketed in the U.S. by our partner Endo under the trademark XIAFLEX® for the treatment of both DC and PD. XIAFLEX® is the first and only FDA-approved nonsurgical treatment for these two indications. We generate revenue primarily from our license agreement with Endo, under which we receive license, sublicense income, royalties, milestones and mark-up on cost of goods sold payments related to the sale, regulatory submissions and approval of XIAFLEX®.

Endo filed a biologics license application for CCH for the treatment of cellulite with the FDA. On July 6, 2020, Endo announced that it received FDA approval of Qwo™ (collagenase clostridium histolyticum- aaes) for the treatment of moderate to severe cellulite in the buttocks of adult women. Endo ~~anticipate~~anticipates that Qwo™ towill be available commercially in the U.S. starting in ~~the~~spring ~~first half of~~ 2021. Endo dosed the first patient in a clinical trial in plantar fibromatosis in June 2020 and adhesive capsulitis, also known as frozen shoulder, in July 2020. Adhesive capsulitis is an inflammation and thickening of the shoulder capsule due to collagen which causes decreased motion in the shoulder. Plantar fibromatosis is a non-malignant thickening of the feet’s deep connective tissue or fascia. There are currently no FDA-approved pharmaceutical therapies available to treat either condition.

~~Second~~On ~~Quarter~~October ~~Highlights~~19, 2020, we entered into an Agreement and ~~Outlook~~Plan of Merger (the “Merger Agreement”) with Endo, and Beta Acquisition Corp., a Delaware corporation and wholly-owned indirect subsidiary of Endo (“Purchaser”). Pursuant to the Merger Agreement, and on the terms and subject to the conditions thereof, Purchaser commenced a tender offer on November 2, 2020 (the “Offer”) to acquire all of the Company’s issued and outstanding shares of common stock (the “Company Shares”) at a purchase price of $88.50 per share, net to the holder thereof in cash, subject to reduction for any applicable withholding taxes and without interest. See Note 8 “Subsequent Events” for disclosure relating to the Merger Agreement.

● Royalty revenues from XIAFLEX for the quarter decreased by 56% primarily as a result of physician office closures and a decline in patients electing to be treated due to the COVID-19 pandemic. Endo expects revenues to begin to recover during the remainder of 2020 as physician and patient activities continue returning toward pre-COVID-19 levels.

●Third InQuarter ~~July~~Highlights ~~2020, Qwo™ (collagenase clostridium histolyticum-aaes), the first~~ and ~~only U.S Food and Drug Administration (FDA)-approved injectable treatment for cellulite was approved by the FDA. Endo’s commercial launch is expected to occur in the first half of 2021.~~Outlook

● ~~Endo~~Overall ~~dosed~~revenues for the ~~first~~quarter ~~patient~~increased inover athe ~~clinical~~prior ~~trial~~quarter inas ~~plantar~~a ~~fibromatosis~~result inof ~~June~~a ~~2020~~$2.0 ~~and~~million ~~adhesive~~milestone ~~capsulitis,~~payment ~~also~~received ~~known~~from asEndo ~~frozen~~which ~~shoulder,~~was indue ~~July~~upon ~~2020.~~the ~~Plantar~~FDA ~~fibromatosis~~approval ~~is a non-malignant thickening~~ of ~~the~~Qwo™ ~~feet's~~(collagenase ~~deep~~clostridium ~~connective~~histolyticum-aaes) ~~tissue~~as orwell ~~fascia~~as ~~that~~a ~~occurs~~recovery inover ~~five to 11 percent of~~ the ~~adult~~previous ~~population~~quarter in ~~the~~sales ~~U.S. Adhesive capsulitis is an inflammation and thickening~~ of ~~the~~XIAFLEX®. ~~shoulder~~Endo ~~capsule~~expects ~~due~~revenues to ~~collagen~~continue ~~which~~to ~~causes~~recover ~~decreased~~during ~~motion in~~ the ~~shoulder~~remainder ~~that occurs in two to five percent~~ of ~~the~~2020 ~~adult~~as ~~population~~physician inand ~~the~~patient ~~U.S.~~activities ~~There~~continue ~~are~~returning ~~currently~~toward ~~no FDA~~pre-~~approved~~COVID-19 ~~pharmaceutical therapies available to treat either condition~~levels.

~~Impact~~● ofIn ~~COVID~~July 2020, Qwo™ (collagenase clostridium histolyticum-19aaes), the first and only U.S Food and Drug Administration (FDA)-approved injectable treatment for cellulite was approved by the FDA. Endo’s commercial launch is expected to occur in spring 2021.

The outbreak of COVID-19 has adversely impacted the U.S. and global economies. Our revenues declined by 56% from the second quarter of 2020 as compared to the second quarter of 2019 as a result of royalties associated with lower net sales due to the impact of COVID-19, including, but not limited to the effect of significant office closures and less office visits for physician-administered products. Based on public disclosures made by Endo, we currently anticipate that 23

Table of Contents

~~revenues~~Impact ~~from our license agreement with Endo will begin to recover during the remainder~~ of ~~2020 as patient activities return to pre-~~COVID-19 ~~levels. We also currently expect full year 2020 revenues to decline compared to full-year 2019 revenues.~~

The outbreak of COVID-19 has adversely impacted the U.S. and global economies. Our year-to-date 2020 royalty revenues declined by 14% as compared to year-to-date 2019 as a result of royalties associated with lower net sales due to the impact of COVID-19, including, but not limited to the effect of significant office closures and less office visits for physician-administered products. Based on public disclosures made by Endo, we currently anticipate that revenues from our license agreement with Endo will continue to recover during the remainder of 2020 as patient activities return to pre-COVID-19 levels. We also currently expect full-year 2020 revenues to decline compared to full-year 2019 revenues due to Endo’s termination of third-party partnership agreements that provided for the sale of XIAFLEX® and and Xiapex® in markets outside of the United States.

License Agreement with Endo

We generate revenue from one source, our license agreement with Endo (the “License Agreement”), under which we receive license, sublicense income, royalties, milestones, and mark-up on cost of goods sold payments related to the sale, regulatory submissions, and approval of XIAFLEX® as described above. Currently, Endo’s licensed rights cover the indications of DC, PD, frozen shoulder, plantar fibromatosis, and other potential indications. We and Endo may further expand the License Agreement to cover other indications as they are developed.

Endo ~~had~~ previously collaborated with partners to commercialize XIAFLEX® and Xiapex® outside of the United States; however, Endo isterminated ~~in the process of terminating~~ third-party partnership agreements for markets outside of the United States, which will reduce the amount of royalty revenues received by us. We do not believe that this reduction will have a material effect on our future consolidated statements of operations.

Significant Risks

We are dependent on third parties, and our licensee, Endo, may not be able to continue successfully commercializing XIAFLEX® for DC and PD, successfully develop XIAFLEX® for additional indications, obtain required regulatory approvals, manufacture XIAFLEX® at an acceptable cost, in a timely manner and with appropriate quality, or successfully market products or maintain desired margins for products sold, and, as a result, we may not achieve sustained profitable operations.

The Company maintains bank account balances, which, at times, may exceed insured limits. The Company has not experienced any losses with these accounts and believes that it is not exposed to any significant credit risk on cash. The Company maintains its investment in money market funds, certificates of deposit, commercial paper, U.S. government agency bonds, municipal bonds, and corporate bonds.

The Company is subject to risks and uncertainties as a result of the global COVID-19 pandemic. While we expect that COVID-19 will impact our business to some degree, the significance and duration of the impact on our business cannot be determined at this time due to numerous uncertainties, including the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and business closures, the effectiveness of actions taken to contain the disease, and other unforeseeable consequences.

For more information regarding the risks facing the Company, please see the risk factors discussed under the heading “Risk Factors” under Part II, Item 1A. herein, under Part II, Item 1A. of our Quarterly Report on Form 10-Q for the ~~quarter~~quarters ended March 31, 2020 and June 30, 2020, and Item 1A. of Part 1 of our 2019 Annual Report.

Critical Accounting Policies, Estimates and Assumptions

Table of Contents

Endo, and on various other assumptions that we believe are reasonable under the circumstances. The financial information at June 30, 2020 and for the three and six month periods ended June 30, 2020 and 2019 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the financial information set forth herein. The December 31, 2019 balance sheet amounts and disclosures included herein have been derived from the Company’s December 31, 2019 audited consolidated financial statements. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2019 included in the Company’s 2019 Annual Report.

As described in Note 2 to our accompanying Condensed Consolidated Financial Statements, there have been no significant changes to our critical accounting policies for the three and six month periods ended June 30, 2020, compared to the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2019 Annual Report.

Table of Contents

Critical Accounting Policies, Estimates and Assumptions

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on historical experience, interim data provided by Endo, and on various other assumptions that we believe are reasonable under the circumstances. The financial information at September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the financial information set forth herein. The December 31, 2019 balance sheet amounts and disclosures included herein have been derived from the Company’s December 31, 2019 audited consolidated financial statements. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2019 included in the Company’s 2019 Annual Report.

As described in Note 2 to our accompanying Condensed Consolidated Financial Statements, there have been no significant changes to our critical accounting policies for the three and nine months ended September 30, 2020, compared to the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2019 Annual Report.

RESULTS OF OPERATIONS

THREE MONTHS ENDED ~~JUNE~~ SEPTEMBER 30, 2020 COMPARED TO THREE MONTHS ENDED ~~JUNE~~ SEPTEMBER 30, 2019

Revenues

We generate revenue primarily from royalties under the License Agreement and, to a lesser degree, licensing fees, sublicensing fees, and milestones.

Royalties

Royalties consist of royalties and the mark-up on cost of goods sold under the License Agreement. Total royalty and mark-up on cost of goods sold for the three~~-month~~ ~~period~~months ended ~~June~~ September 30, 2020 were $3.9.3 million as compared to $8.9.4 million in the corresponding 2019 period~~, representing a decrease of $4~~.9 million or 56%. The decrease in total revenues for the quarterly period was primarily due to royalties associated with lower net sales due to the impact of COVID-19, including, but not limited to the effect of significant office closures and less office visits for physician-administered products.

License Revenue

Under a development and license agreement with Endo, the Company received a milestone payment of $2.0 million in the three months ended September 30, 2020 in conjunction with the FDA approval of Qwo™ (collagenase clostridium histolyticum-aaes) for the treatment of cellulite.

Research and Development Activities and Expenses

R&D expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expenses, facility costs, and overhead. R&D expenses also consist of third-party costs, such as medical professional fees, product costs used in clinical trials, consulting fees, and costs associated with clinical study arrangements. For the three ~~month~~months ~~periods~~ ended ~~June~~ September 30, 2020 and 2019, R&D expenses were $~~160~~179,000 and $~~161~~143,000, respectively, and in each case, are primarily related to the development work associated with our other R&D programs.

We manage the development of XIAFLEX® for uterine fibroids and initiate the development of XIAFLEX® in new potential indications, not licensed by Endo. We presented data from the Phase 1 clinical trial of CCH for the treatment of uterine fibroids at the 66th Annual Meeting of the Society of Reproductive Investigation on March 14, 2019 in Paris, France. This presentation follows positive top-line results announced in October 2018 demonstrating that CCH significantly reduced collagen content in uterine fibroids. We intend to use the Phase 1 data to inform the development of future clinical studies. The Company and its clinical partners continue to analyze the full Phase 1 data to guide the design of a Phase 2 study of CCH for the treatment of uterine fibroids. Costs related to the uterine fibroids program for the three months ended June 30, 2019 were $66,127. There were no costs associated with the uterine fibroids program in the 2020 period.

The successful development of drugs is inherently difficult and uncertain. Our business requires investments in R&D over many years, often for drug candidates that may fail during the R&D process. Even if the Company is able to successfully complete the development of our drug candidates, our long-term prospects depend upon our ability and the ability of our partners, particularly with respect to XIAFLEX®, to continue to commercialize these drug candidates.

There is significant uncertainty regarding our ability to successfully develop drug candidates in other indications. These risks include the uncertainty of:

●

the nature, timing, and estimated costs of the efforts necessary to complete the development of our drug candidate projects;

●

the anticipated completion dates for such drug candidate projects;

Table of Contents

●

the scope, rate of progress, and cost of such clinical trials that we may commence in the future with respect to such drug candidate projects;

●

the scope, rate of progress of preclinical studies, and other R&D activities related to such drug candidate projects;

●

clinical trial results for such drug candidate projects;

●

the cost of filing, prosecuting, defending, and enforcing any patent claims and other intellectual property rights relating to such drug candidate projects;

●

the terms and timing of any strategic alliance, licensing, and other arrangements that we have or may establish in the future relating to our drug candidate projects;

Table of Contents

●

costs relating to future product opportunities;

●

the cost and timing of regulatory approvals with respect to such drug candidate projects; and

●

the cost of establishing clinical supplies for our drug candidate projects.

We believe that our current resources and liquidity are sufficient to advance our current clinical and R&D projects.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs for personnel, third-party royalty fees, consultant costs, legal fees, investor relations, professional fees, and overhead costs. General and administrative expenses for the three~~-month~~ ~~periods~~months ended ~~June~~ September 30, 2020 and 2019 were $43.01 million and $12.70 million, respectively. Increases in general and administrative expenses ~~was~~were mainly due to an increase in headcount and associated compensation costs, ~~separation costs,~~ legal fees, stock compensation expense, ~~consulting fees,~~ and ~~directors~~consulting fees~~, partially offset by lower third-party royalties associated with XIAFLEX®~~.

Milestone Fee

Under a third-party licensing and royalty agreement, the Company incurred a milestone fee of $1.5 million in the third quarter 2020 upon the FDA approval of Qwo™ (collagenase clostridium histolyticum-aaes) for the treatment of cellulite.

Other Income

Other income for the three months ended ~~June~~ September 30, 2020 was $~~391~~265,000 compared to $~~517~~505,000 in the corresponding 2019 period. Other income consists of interest earned on our investments. The decrease is due to lower returns on investments in the 2020 period as compared to the 2019 period.

Provision for Income Taxes

Our deferred tax liabilities and deferred tax assets are impacted by events and transactions arising in the ordinary course of business including stock-based compensation, revenue and leases. For the three~~-month~~ ~~period~~months ended ~~June~~ September 30, 2020, our provision for income taxes was $~~24,000~~1. ~~Our deferred tax liabilities as of June 30, 2020 were $0.~~4 million. The estimated effective tax rate for the three months ended ~~June~~ September 30, 2020 was 1721% of pre-tax income reported in the period, calculated based on the estimated annual effective rate anticipated for the year ending December 31, 2020 plus the effects of certain discrete items occurring in 2020. For the three~~-month~~ ~~period~~months ended ~~June~~ September 30, 2019, our provision for income taxes was $1.16 million. Our ~~deferred tax assets as of June 30, 2019 were $0.2 million. Our~~ effective tax rate for the three months ended ~~June~~ September 30, 2019 was 1420%. Our effective tax rate was also impacted by the discrete impact of current period stock option exercises, which impacts the effective rate in the period in which it occurs.

Net Income

For the three months ended ~~June~~ September 30, 2020, we recorded net income of $05.14 million, or $0.0273 per basic common share and $0.0273 per diluted common share, compared to a net income of $6.43 million, or $0.8886 per basic common share and $0.8785 per diluted common share, for the same period in 2019.

~~SIX MONTHS ENDED JUNE 30, 2020 COMPARED TO SIX MONTHS ENDED JUNE 30, 2019~~26

Table of Contents

NINE MONTHS ENDED SEPTEMBER 30, 2020 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2019

Revenues

We generate revenue primarily from royalties under the License Agreement and, to a lesser degree, licensing fees, sublicensing fees, and milestones.

Royalties

Royalties consist of royalties and the mark-up on cost of goods sold under the License Agreement. Total royalty and mark-up on cost of goods sold for the ~~six~~nine ~~month~~months ~~period~~ ended ~~June~~September 30, 2020 were $1322.68 million as compared to $1726.04 million in the corresponding 2019 period, representing a decrease of $3.46 million, or 2014%. The decrease in total revenues was primarily due to royalties associated with lower net sales due to the impact of COVID-19, including, but not limited to the effect of significant office closures and less office visits for physician-administered products. Royalties also decreased due to Endo’s termination of third-party partnership agreements that provided for the sale of XIAFLEX® and and Xiapex® in markets outside of the United States.

License Revenue

Under a development and license agreement with Endo, the Company received a milestone payment of $2.0 million in the nine months ended September 30, 2020 in conjunction with the FDA approval of Qwo™ (collagenase clostridium histolyticum-aaes) for the treatment of cellulite.

Research and Development Activities and Expenses

26R&D expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expenses, facility costs and overhead. R&D expenses also consist of third-party costs, such as medical professional fees, product costs used in clinical trials, consulting fees, and costs associated with clinical study arrangements. For the nine months ended September 30, 2020 and 2019, R&D expenses were $462,000 and $454,000, respectively, and in each case, are primarily related to the development work associated with our other R&D programs.

Table of Contents

R&D expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expenses, facility costs and overhead. R&D expenses also consist of third party costs, such as medical professional fees, product costs used in clinical trials, consulting fees, and costs associated with clinical study arrangements. For the six month periods ended June 30, 2020 and 2019, R&D expenses were $0.3 million and $0.3 million, respectively, and in each case, are primarily related to the development work associated with our clinical, preclinical and other R&D programs.

The successful development of drugs is inherently difficult and uncertain. Our business requires investments in R&D over many years, often for drug candidates that may fail during the R&D process. Even if the Company is able to successfully complete the development of our drug candidates, our long-term prospects depend upon our ability and the ability of our partners, particularly with respect to XIAFLEX® to continue to commercialize these drug candidates.

There is significant uncertainty regarding our ability to successfully develop drug candidates in other indications. These risks include the uncertainty of:

●

the nature, timing and estimated costs of the efforts necessary to complete the development of our drug candidate projects;

●

the anticipated completion dates for our drug candidate projects;

●

the scope, rate of progress and cost of our clinical trials that we are currently running or may commence in the future with respect to our drug candidate projects;

●

the scope, rate of progress of our preclinical studies and other R&D activities related to our drug candidate projects;

●

clinical trial results for our drug candidate projects;

●

the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights relating to our drug candidate projects;

●

the terms and timing of any strategic alliance, licensing and other arrangements that we have or may establish in the future relating to our drug candidate projects;

●

the cost and timing of regulatory approvals with respect to our drug candidate projects; and

●

the cost of establishing clinical supplies for our drug candidate projects.

We believe that our current resources and liquidity are sufficient to advance our current clinical and R&D projects.

Table of Contents

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs for personnel, third-party royalty fees, consultant costs, legal fees, investor relations, professional fees and overhead costs. General and administrative expenses for the ~~six~~nine months ended ~~June~~September 30, 2020 and 2019 were $710.2 million and $46.6 million, respectively. The increase in general and administrative expenses was mainly due to increased legal fees, an increase in headcount and associated ~~payroll~~compensation costs, separation costs, stock compensation expense and directors’ fees~~, partially offset by lower third party royalties associated with XIAFLEX®~~.

Milestone Fee

Restructuring Charges

On January 7, 2020, we announced that we would be relocating our corporate headquarters from Lynbrook, New York to Wilmington, Delaware as of April 7, 2020. On January 6, 2020, in connection with the relocation, we notified five employees and one consultant that their services would no longer be required effective March 31, 2020. On March 23, 2020, the five employees and one consultant were given separation agreements detailing the termination benefits to which they would be entitled. As a result, we recorded a one-time restructuring charge of $1.1 million in the first quarter of fiscal 2020. The restructuring charge is primarily associated with $0.9 million of one-time termination benefits ~~that~~being wepaid ~~expect~~out in cash over the six months beginning April 2020 and $0.2 million of one-time non-cash termination expenses associated with the acceleration of vesting of certain stock options and restricted stock units.

Table of Contents

to pay out in cash over the six- month period beginning April 2020 and $0.2 million of one-time non-cash termination expenses associated with the acceleration of vesting of certain stock options and restricted stock units.

Other Income

Other income for the ~~six~~nine months ended ~~June~~September 30, 2020 was $01.91 million compared to $1.05 million in the corresponding 2019 period. Other income consists of interest earned on our investments.

Provision for Income Taxes

Our deferred tax liabilities and deferred tax assets are impacted by events and transactions arising in the ordinary course of business including stock-based compensation, revenue and leases. For the ~~six~~nine ~~month~~months ~~period~~ ended ~~June~~September 30, 2020, ~~our~~the provision for income taxes was $1.2 ~~million~~.6 ~~Our deferred tax liabilities as of June 30, 2020 were $0.4~~ million. The estimated effective tax rate for the ~~six~~nine months ended ~~June~~September 30, 2020 was 21% of pre-tax income reported in the period, calculated based on the estimated annual effective tax rate anticipated for the year ending December 31, 2020 plus the effects of certain discrete items occurring in 2020. For the ~~six~~nine ~~month~~months ~~period~~ ended ~~June~~September 30, 2019, our provision for income taxes was $23.27 million. ~~Our deferred tax assets as of June 30, 2019 were $0.2 million.~~ The estimated effective tax rate for the ~~three~~nine months ended ~~June~~September 30, 2019 was 1718% of pre-tax income reported in the period, calculated based on the estimated annual effective tax rate anticipated for the year ending December 31, 2019 plus the effects of certain discrete items occurring in 2019 including current period stock option exercises.

Net Income

For the ~~six~~nine months ended ~~June~~September 30, 2020, we recorded net income of $410.60 million, or $01.6336 per basic common share and $01.6336 per diluted common share, compared to a net income of $1017.81 million, or $12.4934 per basic common share and $12.4833 per diluted common share, for the same period in 2019.

Liquidity and Capital Resources

To date, we have financed our operations primarily through product sales, licensing revenues and royalties under agreements with third parties and sales of our common stock.

At ~~June~~September 30, 2020 and December 31, 2019, we had cash and cash equivalents and investments in the aggregate of $~~119~~121.80 million and $105.8 million, respectively. We currently anticipate that our available funds and cash flow from operations will be sufficient to meet our operational cash needs for at least the next 12 months from the date of this filing.

On June 26, 2020, we filed a shelf registration statement on Form S-3, which we subsequently amended on July 15, 2020, relating to the sale, from time to time, in one or more transactions, of up to $200,000,000 of common stock, preferred stock, debt securities, warrants, and units (the “Shelf Registration Statement”). The Shelf Registration Statement was declared effective on July 17, 2020. As of July 31, 2020, $200,000,000 remained available for issuance under the Shelf Registration Statement. As set forth in the Shelf Registration Statement, the Company expects to use a substantial portion of the net proceeds from the sale of securities under the Shelf Registration Statement for general corporate purposes; the Company, however, has not allocated the net proceeds for specific purposes.

Net cash provided by operating activities for the six months ended June 30, 2020 was $14.8 million as compared to $9.8 million in the 2019 period. Net cash provided by operating activities in the 2020 period was primarily attributable to our net income plus a reduction in accounts receivable of $7.4 million and increases in accounts payable, accrued expenses and lease obligation of $1.1 million and an increase in income taxes payable of $1.3 million. Non-cash items used to reconcile net income to net cash provided by operating activities of $0.9 million included amortization of patent costs and bond premiums and discounts, deferred tax benefits, and stock-based compensation expense. Net cash provided by operating activities in the 2019 period was primarily attributable to our net income partially offset by a reduction in accounts payable and accrued expenses of $1.1 million and an increase in prepaid expenses of $0.4 million. Non-cash items used to reconcile net income to net cash provided by operating activities of $0.6 million included amortization of patent costs and bond premiums and discounts and stock-based compensation expense.

Net cash used in investing activities for the six months ended June 30, 2020 was $2.6 million as compared to net cash used in investing activities of $10.7 million for the corresponding 2019 period. The net cash used in investing activities in the

Table of Contents

On June 26, 2020, ~~period~~we ~~reflects~~filed a shelf registration statement on Form S-3, which we subsequently amended on July 15, 2020, relating to the ~~investment~~sale, from time to time, in one or more transactions, of up to $~~63.1~~200,000,000 ~~million~~of common stock, preferred stock, debt securities, warrants, and units (the ~~maturing~~“Shelf ofRegistration ~~$60~~Statement”).6 ~~million~~The inShelf ~~marketable~~Registration ~~securities~~Statement was declared effective on July 17, 2020. As ~~The~~of ~~net~~September ~~cash~~30, ~~used~~2020, in$200,000,000 ~~investing~~remained ~~activities~~available for issuance under the Shelf Registration Statement. As set forth in the ~~2019~~Shelf ~~period~~Registration ~~reflects~~Statement, the ~~investment~~Company expects to use a substantial portion of ~~$53.1~~the ~~million~~net ~~and~~proceeds from the ~~maturing~~sale of ~~$42.5~~securities ~~million~~under inthe ~~marketable~~Shelf ~~securities~~Registration Statement for general corporate purposes; the Company, however, has not allocated the net proceeds for any specific purposes.

~~Net~~On ~~cash~~August ~~used~~31, in2020, ~~financing~~the ~~activities~~Company ~~for~~entered ~~the~~into ~~six~~an ~~months~~At-The-Market ~~ended~~Equity ~~June~~Sales ~~30,~~Agreement ~~2020~~(the ~~was~~“ATM ~~$0.4~~Agreement”) ~~million~~with asStifel, ~~compared~~Nicolaus to& ~~net~~Company, ~~cash~~Incorporated ~~provided~~(“Stifel”) byand ~~financing~~Oppenheimer ~~activities~~& ofCo. $1Inc.6 ~~million~~(“Oppenheimer” inand, ~~the~~together ~~corresponding~~with ~~2019~~Stifel, ~~period.~~the In“Agents”) ~~the~~pursuant ~~2020~~to ~~period,~~which ~~net~~the ~~cash~~Company ~~used~~may inissue ~~financing~~and ~~activities~~sell, ~~was~~from ~~due~~time to ~~the~~time, ~~repurchase~~at ofits ~~$0.4~~option, ~~million~~shares of ~~our~~its common stock, ~~under our stock repurchase program partially offset by proceeds received from stock option exercises of~~ $~~62,000~~0.001 Inpar ~~the~~value ~~2019~~per ~~period~~share, ~~net~~having ~~cash~~an ~~provided~~aggregate byoffering ~~financing~~price ~~activities~~of ~~was~~up ~~due~~ to ~~proceeds received from stock option exercises of~~ $~~1.7~~75,000,000 ~~million~~(the ~~partially~~“ATM ~~offset~~Shares”) bythrough the ~~repurchase~~Agents, ofas ~~$0.1~~its ~~million~~sales ~~of our common stock under our stock repurchase program~~agents.

Subject to the terms and conditions of the ATM Agreement, the Agents will use their commercially reasonable efforts to sell the ATM Shares from time to time, based upon the Company’s instructions, by methods deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act. The Company has agreed to pay the Agents’ commissions for their services in acting as the Company’s agents in the sale of the ATM Shares in the amount of 3.0% of gross proceeds from the sale of the ATM Shares pursuant to the ATM Agreement. The Company also has agreed to provide the Agents with customary indemnification and contribution rights. The offering of the ATM Shares will terminate upon the earliest of (a) the sale of the maximum number or amount of the ATM Shares permitted to be sold under the ATM Agreement and (b) the termination of the ATM Agreement by the parties thereto.

During the third quarter, the Company did not make any sales under the ATM Agreement.

Net cash provided by operating activities for the nine months ended September 30, 2020 was $16.4 million as compared to $14.5 million in the 2019 period. Net cash provided by operating activities in the 2020 period was primarily attributable to net income, a reduction in accounts receivable of $5.5 million, and non-cash items used to reconcile net income to net cash provided by operating activities of $1.8 million. Net cash provided by operating activities in the 2019 period was primarily attributable to our net income partially offset by a reduction in accounts payable, accrued expenses and income taxes payable of $1.9 million and an increase in accounts receivable of $1.3 million. Non-cash items used to reconcile net income to net cash provided by operating activities of $0.9 million included amortization of patent costs, bond premiums and discounts, stock-based compensation expense and deferred tax expense.

Net cash used in investing activities for the nine months ended September 30, 2020 was $18.2 million as compared to net cash used in investing activities of $16.7 million for the corresponding 2019 period. The net cash used in investing activities in the 2020 period primarily reflects the investment of $105.4 million and the maturing of $87.3 million in marketable securities. The net cash used in investing activities in the 2019 period reflects the investment of $93.4 million and the maturing of $76.6 million in marketable securities.

Net cash used in financing activities for the nine months ended September 30, 2020 was $0.4 million as compared to net cash provided by financing activities of $1.8 million in the corresponding 2019 period. In the 2020 period, net cash used in financing activities was due to the repurchase of $0.4 million of our common stock under our stock repurchase program partially offset by proceeds received from stock option exercises of $62,000. In the 2019 period, net cash provided by financing activities was due to proceeds received from stock option exercises of $2.1 million partially offset by the repurchase of $0.4 million of our common stock under our stock repurchase program.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Table of Contents

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the management of the Company (“Management”), including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, Management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

The Company, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our principal executive officer and principal financial officer concluded, as of the end of the period covered by this Quarterly Report, that the Company’s disclosure controls and procedures were effective in the timely and accurate recording, processing, summarizing, and reporting of material financial and non-financial information within the time periods specified within the SEC’s rules and forms. Our principal executive officer and principal financial officer also concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our Management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There were no changes in our internal control over financial reporting (as defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) that occurred during the three months ended ~~June~~ September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

On June 12, 2020, the Company filed an arbitration demand against the Research Foundation of the State University of New York for and on behalf of Stony Brook University (“Research Foundation”) seeking a declaration that one of its former employees is a co-investor of the Research Foundation’s patent for the treatment of cellulite (U.S. Patent No. 10,123,959, which has an expiration date of February 7, 2027), and challenging the Research Foundation’s prospective rights to royalties under the Cellulite License Agreement dated August 23, 2007 (the “Cellulite License Agreement”), which is described in the Company’s 2019 Annual Report. This is a private and confidential arbitration administered by the American Arbitration Association. The Research Foundation has denied the allegations of the demand and asserted counterclaims alleging principally that the Company is in breach of its obligations under the Cellulite License Agreement. The Company has responded to the counterclaim, denying the allegations and requesting judgment in its favor on all claims. However, should the Research Foundation prevail in this arbitration, it could have a material adverse effect on the Company’s future financial results.

29See Note 8 “Subsequent Events” for disclosure regarding litigation related to the Merger Agreement.

Table of Contents

rights to royalties under the Cellulite License Agreement dated August 23, 2007, which is described in the Company’s 2019 Annual Report. This is a private and confidential arbitration administered by the American Arbitration Association. On July 9, 2020, the Research Foundation filed a response denying the allegations of the demand and making a counterclaim alleging principally that the Company is in breach of its obligations under the Cellulite License Agreement. The Company has responded to the counterclaim, denying the allegations and requesting judgment in its favor on all claims. However, should the Research Foundation prevail in this arbitration, it could have a material adverse effect on the Company’s future financial results. See Note 8, “Subsequent Events,” for disclosure concerning FDA approval and postponement of commercial launch of the cellulite indication.

Item 1A. Risk Factors

Risks Related to Our Business and Operations

Our business may be adversely affected by the ongoing coronavirus pandemic.

COVID-19 has resulted in global business and economic disruption and extreme volatility in the financial markets as many jurisdictions have placed restrictions on travel and non-essential business operations and implemented social distancing, shelter-in-place, quarantine, and other similar measures for their residents to contain the spread of the virus. The extent to which the coronavirus impacts our operations will depend on future developments, which are highly uncertain and cannot ~~be predicted at this time, and include the duration, severity, and scope of the outbreak and the actions taken to contain or treat the coronavirus outbreak.~~

Table of Contents

be predicted at this time, and include the duration, severity, and scope of the outbreak and the actions taken to contain or treat the coronavirus outbreak.

The continued spread of COVID-19 globally could materially and adversely impact our operations including without limitation, future clinical trial operations, regulatory approval and the timing thereof, the operations of our collaboration partners, travel, and employee health and availability which may have a material and adverse effect on our business, financial condition, and results of operations. Specifically, depending upon the length and severity of the pandemic, COVID-19 could impact:

●

Our future clinical trial plans, specifically with respect to uterine fibroids;

●

Endo’s development programs for the CCH treatment of plantar fibromatosis and adhesive capsulitis;

● Endo’s commercialization and launch of CCH treatment for cellulite which has already been postponed until spring 2021 because of the pandemic; and

●

Endo’s ability to manufacture, market, and sell XIAFLEX® with respect to DC and PD.

In addition, a recession, depression or other sustained adverse market event could materially and adversely affect the financial markets, our business, the value of our common stock and our royalty streams. The coronavirus pandemic continues to rapidly evolve. The ultimate impact of the coronavirus pandemic on us is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted.

COVID-19 could materially and adversely affect Endo’s business, which in turn would impact our business.

As we are dependent upon revenue from Endo, Endo’s operating success or failure has a significant impact on our potential royalty stream and other payment rights. Accordingly, the following impacts of COVID-19 on Endo’s business, could materially affect our business.

In response to public health directives and orders, Endo has implemented alternative working practices and work-from-home requirements for appropriate employees, as well as temperature screenings, health questionnaires, social distancing, modified schedules, shift rotation, and other similar policies at its manufacturing facilities. Endo launched a hybrid approach selling model as of June 1, 2020 for its field employees, which allows virtual and/or live engagement with healthcare providers and other customers. Endo has also suspended international and domestic travel. The effects of COVID-19, including these public health directives and orders and Endo’s policies, have had an impact on Endo’s business and may in the future materially disrupt its business (including its manufacturing and supply chain operations by significantly reducing its output), negatively impacting its productivity, and delaying its product development programs.

~~COVID-19~~The global pandemic may have significant impacts on third-party arrangements, including those with Endo’s manufacturing, supply chain, and distribution partners, information technology and other service providers and business partners. For example, there may be significant disruptions in the ability of any or all of Endo’s third-party providers to meet their obligations to Endo on a timely basis, or at all, which may be caused by their own financial or operational difficulties, including any closures of their facilities pursuant to a governmental order or otherwise. Due to these disruptions and other factors, including changes in Endo’s workforce availability, and increased demand for some of Endo’s critical care products during this pandemic, Endo’s ability to meet its obligations to third-party distribution partners may be negatively impacted. As a result, Endo has delivered, and in the future Endo or its third-party providers may deliver, notices of the occurrence of a force majeure or similar events under certain of its third-party contracts, which could result in prolonged commercial disputes and ultimately legal proceedings to enforce contractual performance and/or recover losses. Any such occurrences could result in significant management distraction and use of resources and, in the event of an adverse judgment, could result in significant cash payments. Further, the publicity of any such dispute could harm Endo’s reputation and make the negotiation of any replacement contracts more difficult and costly, thereby prolonging the effects of any resulting disruption in Endo’s operations. Such disruptions could be acute with respect to certain of its raw material suppliers where Endo may not have readily accessible alternatives or alternatives may take longer to source than usual. While Endo attempts, when possible, to mitigate its raw material supply risks through stock management and alternative sourcing strategies, some raw materials are only available from one source. Any of these disruptions could harm Endo’s ability to manufacture XIAFLEX® and its ability to meet consumer demand, including any increase in demand for any of its products.

3031

Table of Contents

~~closures~~Endo ofhas ~~their~~experienced, ~~facilities~~and ~~pursuant~~expects to acontinue ~~governmental~~to ~~order~~experience, orchanges ~~otherwise.~~in ~~Due~~customer todemand ~~these~~as ~~disruptions~~the ~~and~~COVID-19 ~~other~~pandemic ~~factors~~continues to evolve, ~~including~~which ~~changes~~are indifficult ~~Endo’s~~to ~~workforce~~predict. ~~availability,~~The ~~Endo’s~~current ~~ability~~economic tocrisis ~~meet~~and ~~its~~increased ~~obligations~~unemployment torates ~~third~~resulting from COVID-~~party~~19 ~~distribution~~have ~~partners~~the ~~may~~potential beto ~~negatively~~significantly ~~impacted.~~reduce Asindividual adisposable ~~result,~~income ~~Endo~~and ~~has~~depress ~~delivered~~consumer confidence, ~~and~~which incould limit the ~~future~~ability ~~Endo~~of orsome ~~its~~consumers ~~third-party~~to ~~providers~~purchase ~~may~~certain ~~deliver,~~pharmaceutical ~~notices~~products ofand ~~the~~reduce ~~occurrence~~consumer ofspend aon ~~force~~certain ~~majeure~~medical orprocedures ~~similar~~in ~~event~~both ~~under~~the ~~certain~~short- ofand ~~its third~~medium-~~party~~term. ~~contracts~~Additionally, ~~which~~as ~~could~~part ~~result~~of inthe ~~prolonged~~measures ~~commercial~~to ~~disputes~~address ~~and~~COVID-19, ~~ultimately~~certain ~~legal~~healthcare ~~proceedings~~providers toare ~~enforce~~not ~~contractual~~currently ~~performance~~performing ~~and/or~~various ~~recover~~medical ~~losses~~procedures, including those that use XIAFLEX®. ~~Further~~For example, beginning in the ~~publicity~~last two weeks of ~~any~~the ~~such~~first ~~dispute~~quarter ~~could~~of ~~harm~~2020, certain of Endo’s ~~reputation~~products ~~and~~that ~~make~~are ~~the~~physician ~~negotiation~~administered, ofincluding ~~any~~XIAFLEX®, ~~replacement~~experienced ~~contracts~~significantly ~~more~~decreased ~~difficult~~sales volumes due to reduced physician office activity and ~~costly,~~patient ~~thereby~~office ~~prolonging~~visits ~~the~~compared ~~effects~~to prior year because of ~~any~~the ~~resulting~~COVID-19 ~~disruption~~pandemic. inFurthermore, Endo’s ~~operations.~~is ~~Such~~unable ~~disruptions~~to ~~could~~predict bethe ~~acute~~impact ~~with~~that ~~respect~~COVID-19 tomay ~~certain~~have ofgoing forward on its ~~raw~~business, ~~material~~results ~~suppliers~~of ~~where~~operations ~~Endo~~or ~~may~~financial ~~not~~position ~~have~~of ~~readily~~any ~~accessible~~of ~~alternatives~~its ormajor ~~alternatives~~customers, ~~may~~which ~~take~~could ~~longer~~impact each customer to ~~source~~varying ~~than~~degrees ~~usual.~~and ~~Any~~at ofdifferent ~~these~~times ~~disruptions~~and could ~~harm~~ultimately impact its financial performance. Certain of Endo’s ~~ability~~competitors may also be better equipped to ~~manufacture~~weather ~~XIAFLEX®~~the impact of COVID-19 both domestically and abroad and better able to address changes in customer demand.

Additionally, Endo’s ~~has~~product ~~experienced~~development programs have been, and ~~expects~~may to continue to ~~experience~~be, ~~changes~~adversely inaffected ~~customer~~by ~~demand~~the asglobal pandemic and the ~~COVID-19~~prioritization ~~pandemic~~of ~~evolves.~~production ~~The~~during ~~current~~this ~~economic~~pandemic. ~~crisis~~The ~~and~~public ~~rising~~health ~~unemployment~~directives ~~rates~~in ~~resulting~~response ~~from~~to COVID-19 requiring social distancing and restricting non-essential business operations have ~~the~~in ~~potential~~certain tocases ~~significantly~~caused ~~reduce~~and ~~individual~~may ~~disposable~~continue ~~income~~to cause delays, increased costs, and ~~depress~~additional ~~consumer~~challenges ~~confidence~~in Endo’s product development programs, ~~which~~including ~~could~~obtaining ~~limit~~adequate ~~the~~patient ~~ability~~enrollment ofand ~~some~~successfully ~~consumers~~bringing product candidates to ~~purchase~~market. ~~certain~~In ~~pharmaceutical~~addition, ~~products~~Endo ~~and~~may ~~reduce~~face ~~consumer~~additional ~~spend~~challenges onreceiving ~~certain~~regulatory ~~medical~~approvals ~~procedures~~as inpreviously ~~both~~scheduled dates or anticipated deadlines for action by the ~~short-~~FDA on its applications and ~~medium-term.~~products ~~Additionally~~in development, including dates scheduled for 2020, could be subject to delays beyond Endo’s control as ~~part~~regulators ofsuch as the ~~measures~~FDA tofocus ~~address~~on COVID-19. For example, ~~certain~~as ~~healthcare~~a ~~providers~~result ~~are~~of ~~not~~COVID-19 ~~currently~~and ~~performing~~its ~~various~~impact on medical ~~procedures~~aesthetics physician office closures and consumer spending, ~~including~~Endo ~~those~~has ~~that~~moved ~~use~~the ~~XIAFLEX®~~anticipated product launch of Qwo™ to spring 2021. ~~For~~In ~~example~~addition, ~~during~~Endo has assessed, and expects to continue to assess, the ~~last~~timeline ~~two~~for ~~weeks~~commercialization of other products. Additionally, COVID-19 could increase the ~~first~~magnitude ~~quarter~~of many of ~~2020~~the other risks described herein and ~~continuing~~in ~~into~~our 2019 Annual Report and Endo’s Annual Report on Form 10-K for the ~~second~~fiscal ~~quarter~~year ofended ~~2020~~December 31, ~~XIAFLEX®~~2019, ~~began~~as ~~experiencing~~subsequently ~~significantly~~supplemented ~~decreased~~and ~~sales~~amended, ~~volumes~~and ~~due~~have other adverse effects on Endo’s operations that Endo is not currently able to ~~reduced~~predict. ~~physician~~For ~~office~~example, ~~activity~~the global economic disruptions and ~~patient~~volatility ~~office~~in ~~visits~~the ~~compared~~financial markets could further depress Endo’s ability to ~~prior~~obtain ~~year~~or ~~because~~renew ofinsurance on satisfactory terms or at all. Additionally, Endo may also be required to delay or limit its internal strategies in the ~~COVID~~short-19 ~~pandemic~~and medium-term by, for example, redirecting significant resources and management attention away from implementing Endo’s strategic priorities or executing opportunistic corporate development transactions.

~~Additionally,~~The ~~Endo’s~~magnitude ~~product~~of ~~development~~the ~~programs~~effect ~~have~~of ~~been,~~COVID-19 ~~and~~on ~~may~~Endo’s ~~continue~~business towill bedepend, ~~adversely~~in ~~affected~~part, byon the ~~global~~length ~~pandemic~~ and ~~the~~severity ~~prioritization~~ of ~~production~~the ~~during~~restrictions ~~this~~(including ~~pandemic.~~the ~~The~~effects ~~public~~of ~~health~~any ~~directives in response to COVID~~“re-19opening” ~~requiring~~actions ~~social distancing~~ and ~~restricting~~plans) ~~non-essential business operations have in certain cases caused~~ and ~~may~~other ~~continue~~limitations toon ~~cause delays, increased costs, and additional challenges in~~ Endo’s ~~product~~ability ~~development~~to ~~programs,~~conduct ~~including~~its ~~obtaining~~business ~~adequate~~in ~~patient~~the ~~enrollment~~ordinary ~~and successfully bringing product candidates to market~~course. InThe ~~addition,~~longer ~~Endo~~the ~~may~~pandemic ~~face~~continues ~~additional challenges receiving regulatory approvals as previously scheduled dates~~ or ~~anticipated~~resurges, ~~deadlines~~the ~~for~~more ~~action~~severe by the ~~FDA~~impacts ondescribed ~~its~~above ~~applications~~will ~~and products in development could~~ be ~~subject~~on toboth ~~delays beyond~~ Endo’s ~~control~~domestic asand ~~regulators~~international ~~such as the FDA focus on COVID-19~~business. ~~For~~The ~~example~~extent, aslength ~~a result of COVID-19~~ and ~~its~~consequences ~~impact on medical aesthetics physician office closures and consumer spending, Endo has moved the anticipated product launch~~ of ~~Qwo™ to~~ the ~~first~~pandemic ~~half~~are ofuncertain ~~2021. In addition, Endo has assessed,~~ and ~~expects~~impossible to ~~continue to assess~~predict, ~~the~~but ~~timeline for the development and commercialization of other products, which~~ could ~~include~~be ~~CCH treatment for frozen shoulder and plantar fibromatosis~~material.

~~The magnitude of the effect of~~ COVID-19 onand ~~Endo’s~~other ~~business~~similar ~~will depend~~outbreaks, inepidemics ~~part,~~or onpandemics ~~the~~could ~~length~~have ~~and severity of the restrictions (including the effects of recent “re-opening” actions and plans following~~ a ~~recent~~material ~~slowdown~~adverse ofeffect ~~the virus infection rate in certain countries and localities) and other limitations~~ on Endo’s ~~ability to conduct its~~ business, infinancial ~~the~~condition, ~~ordinary~~results ~~course.~~of ~~The~~operations ~~extent, length~~ and ~~consequences~~cash offlows ~~the~~and ~~pandemic~~could ~~are~~cause ~~uncertain~~significant ~~and~~volatility ~~impossible~~in tothe ~~predict,~~trading ~~but~~prices ~~could~~of beEndo’s ~~material~~securities.

In addition to the other information contained elsewhere in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in “Part I, Item 1A. Risk Factors” in our 2019 Annual Report and under Part II, Item 1A. of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which could materially affect our business, financial condition or future results.

Risks Related to the Proposed Merger with Endo

We have entered into a Merger Agreement with Endo to be acquired, and the pending sale of our Company poses certain risks to our business, including disrupting our business operations and subjecting us to litigation, as well as diverting management’s efforts from focusing on our business and affecting our ability to retain, recruit and motivate key personnel.

On October 19, 2020, we entered into a Merger Agreement with Endo and Purchaser. Pursuant to the Merger Agreement, and subject to its terms and conditions, we expect to be acquired by Endo in a cash tender offer, followed by a subsequent merger between us and Purchaser, whereby we would survive as a wholly owned subsidiary of Endo. This transaction represents a total equity value of approximately $658.0 million on a fully-diluted basis.

The proposed Merger, whether or not consummated, may result in a diversion of management’s attention from day-to-day operations and a loss of key personnel, and may affect our ability to recruit prospective employees, retain and motivate existing employees or cause a disruption in our operations. The proposed Merger may also affect our relationships with

Table of Contents

third parties, including customers, suppliers and partners. For example, entities that deal with us could defer decisions concerning a continued relationship with us, or seek to alter and terminate existing business relationships with us.

The Merger Agreement imposes customary restrictions on the conduct of our business outside of the ordinary course consistent with past practice prior to the closing of the transactions contemplated by the Merger Agreement or the termination of the Merger Agreement, which may also adversely affect our ability to manage our operations effectively in light of changes in economic or market conditions, or to execute or adjust our business strategy. In addition, litigation is common in connection with sales of publicly traded companies similar to us. As a result, we and our directors and officers may become parties to lawsuits relating to the Merger, which, even if these lawsuits are without merit, could be time consuming, expensive and divert the attention of our management from operating our business. If we experience the potential consequences of any of the foregoing risks, our results of operations, financial condition and prospects could be materially and adversely affected.

The Merger Agreement contains certain termination rights of Endo and the Company and provides that, upon the termination of the Merger Agreement under specified circumstances, the Company may be required to pay Endo a termination fee of $23.04 million. If we are required to pay a termination fee pursuant to the Merger Agreement, our results of operations and financial position could be materially and adversely affected.

The tender offer, proposed Merger and pending sale of our Company may not be completed within the expected timeframe, or at all, and the failure to complete these transactions could adversely affect our business and the price of our common stock.

We cannot predict with certainty whether or when the tender offer, proposed Merger and pending sale of our Company will be completed. Delays in these transactions could worsen the overall risks associated with these transactions. If the pending sale of our Company is not completed, the price of our common stock may drop to the extent that the current price of our common stock reflects an assumption that the sale may be completed. We have incurred, and continue to incur, significant transaction costs in connection with the pending Merger, for which we will have received little or no benefit if these transactions are not completed. Many of these costs will be payable even if the pending Merger is not completed and may relate to activities that we would not have undertaken other than to consummate the Merger. Further, a failed transaction may result in negative publicity and may cause a negative impression about us in the investment community. Finally, any disruption to our business resulting from the announcement and pendency of the tender offer and Merger, including any adverse impact in our relationships with employees, customers, suppliers or partners, could continue or accelerate in the event of a failed transaction. There can be no assurance that our business, these relationships or our financial condition will not be adversely affected, as compared to the condition prior to the announcement of the tender offer, if the Merger is not completed.

Purchaser’s obligation to purchase the Company Shares and the completion of the Merger is subject to a number of conditions, including, among others (i) the valid tender of at least a majority of outstanding Company shares; (ii) the expiration or termination of any waiting period (and extensions thereof) applicable to the transactions contemplated by the Merger Agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), or under any other antitrust law of a governmental authority of competent and applicable jurisdiction in Ireland; (iii) the absence of any law or order prohibiting or otherwise preventing the consummation of the Offer or the Merger; and (iv) other customary conditions set forth in the Merger Agreement, which make the completion and timing of the Merger uncertain. The failure to satisfy all of the required conditions could delay the completion of the Merger for a significant period of time or prevent it from occurring at all. There can be no assurance that the conditions to the completion of the Merger will be satisfied or waived or that the Merger will be completed.

If the Merger is not completed, the Company may be materially adversely affected and, without realizing any of the benefits of having completed the Merger, will be subject to a number of risks, including the following:

●

The market price of the Company’s common stock could decline;

●

If the Merger Agreement is terminated and the Company’s Board of Directors seeks another business combination, Company stockholders cannot be certain that the Company will be able to find a party willing to enter into a transaction on terms equivalent to or more attractive than the terms that Endo and Purchaser have agreed to in the Merger Agreement;

Table of Contents

●

The time and resources, financial and other, committed by Company management to matters relating to the Merger could otherwise have been devoted to pursuing other beneficial opportunities;

●

The Company could experience negative reactions; and

●

The Company will be required to pay its costs relating to the Merger, such as legal, accounting, financial advisory and printing fees, whether or not the Merger is completed.

Any of these risks could materially and adversely impact the Company’s ongoing business, financial condition, financial results and stock price.

The Merger is subject to the expiration or termination of applicable waiting periods and the receipt of approvals, consents or clearances from regulatory authorities that may impose conditions that, if not obtained, could prevent completion of the Merger.

Before the Merger may be completed, any applicable waiting period (and any extension thereof) under the HSR Act relating to the completion of the Merger must have expired or been terminated and any authorization or consent from a governmental authority required to be obtained with respect to the Merger under certain other applicable foreign regulatory laws must have been obtained. In deciding whether to grant the required regulatory authorization or consent, the relevant governmental entities will consider the effect of the Merger within their relevant jurisdiction, including, among other things, the impact on the parties’ respective customers and suppliers and the applicable defense ministry and the impact of the parties’ foreign investment in the jurisdiction. The terms and conditions of the authorizations and consents that are granted, if any, may impose requirements, limitations or costs or place restrictions on the conduct of the combined company’s business or may materially delay the completion of the Merger.

Under the Merger Agreement, the Company and Endo have agreed to use their respective reasonable best efforts to obtain such authorizations and consents. However, the Company’s and Endo’s obligations to take such actions are subject to limitations, including that Endo need not take actions with respect to the Company if such action would reasonably be expected to be material to the business, assets or financial condition of the Company or materially detrimental to the benefits Endo expects as a result of the Merger.

In addition, at any time before or after the completion of the Merger, and notwithstanding the termination of applicable waiting periods, the applicable U.S. or foreign regulatory authorities or any state attorney general could take such action under antitrust laws as such party deems necessary or desirable in the public interest. Such action could include, among other things, seeking to enjoin the completion of the Merger or seeking divestiture of substantial assets of the parties. In addition, in some circumstances, a third party could initiate a private action challenging, seeking to enjoin, or seeking to impose conditions on the Merger. Endo and the Company may not prevail and may incur significant costs in defending or settling any such action.

There can be no assurance that the conditions to the completion of the Merger set forth in the Merger Agreement relating to applicable regulatory laws will be satisfied.

Litigation related to the Merger may prevent the Merger from being consummated at all or within the expected timeframe and may result in substantial costs to us.

As described in Note 8 “Subsequent Events,” a complaint has been filed by an alleged stockholder of the Company against the Company and each of the members of the Company’s Board of Directors, purportedly in relation to the alleged omission of material facts related to the Merger from the Solicitation/Recommendation Statement on Schedule 14D-9 (the “Schedule 14D-9”) that was filed with the SEC by the Company in connection with the proposed Merger on November 2, 2020, in alleged violation of Section 14(e), 14(d) and 20(a) of the Securities Exchange Act of 1934. Plaintiff seeks to enjoin the closing of the Merger or, in the event that the Merger is consummated, recover damages, costs and fees. If injunctive relief is granted, then the Merger may not be consummated at all or within the expected timeframe. Also, if the Company’s insurance provider were to deny coverage under the existing insurance policies covering such actions or should such policies fail to cover the costs of defending the lawsuit, we may incur substantial costs.

The Company is not able to estimate any possible loss from this litigation at this time. It is possible that additional lawsuits may be filed in connection with the proposed Merger.

Table of Contents

In addition to the other information contained elsewhere in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in “Part I, Item 1A. Risk Factors” in our 2019 Annual Report and under Part II, Item 1A. of our Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, which could materially affect our business, financial condition or future results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the ~~six-month~~nine ~~period~~months ended ~~June~~ September 30, 2020, we did not issue any unregistered shares of securities.

Issuer Purchases of Equity Securities

On May 23, 2019, the Company announced the authorization of a new stock repurchase program under which we can repurchase up to $4 million of our outstanding common stock. Pursuant to the repurchase program, from time to time we repurchase stock through a broker in the open market, provided that the timing, actual number and price per share of the common stock to be purchased will be subject to market conditions, applicable legal requirements, including Rule 10b-18 of the Exchange Act, and various other factors. The stock repurchase program terminated in May 2020.

31The following table presents a summary of share repurchases made by us during the nine months ended September 30, 2020.

Table of Contents

The following table presents a summary of share repurchases made by us during the six months ended June 30, 2020.


					Maximum
				Total Number of	Number (or
				Shares	Dollar Value) of
	Total Number	Average		Purchased as	Shares that May
	of Shares	Price Paid		Part of Publicly	Yet be Purchased
Period	Purchased ⁽¹⁾	Per Share ⁽²⁾		Announced Plan	under the Plan ⁽³⁾
Remaining balance as of December 31, 2019					$	3,379,349
January 1, 2020 – January 31, 2020	1,709	$	56.66	13,096		3,282,509
February 1, 2020 – February 29, 2020	848	$	61.39	13,944		3,230,446
March 1, 2020 – March 31, 2020	1,510	$	47.77	15,454		3,158,318
April 1, 2020 – April 30, 2020	2,677	$	53.93	18,131		3,013,957
May 1, 2020 – May 31, 2020	829	$	57.14	18,960	$	2,966,587
Total	7,573

(1)	The purchases were made in open-market transactions in compliance with Exchange Act Rule 10b-18 or under the company’s 10b-18 plan.

(2)	Includes commissions paid, if any, related to the stock repurchase transactions.

(3)	On May 23, 2019, we announced that our Board of Directors had authorized the repurchase of up to $4.0 million of our common stock under the stock repurchase program. This program terminated in May 2020.

3235

Table of Contents

Item 6. Exhibits


1.1	At-The-Market Equity Offering Sales Agreement, dated August 31, 2020, among the Company, Stifel, Nicolaus & Company, Incorporated and Oppenheimer & Co. Inc. (incorporated by reference to Exhibit 1.1 of the Company’s Current Report on Form 8-K filed August 31, 2020 (File No. 000-19879))
3.1	Certificate of Designation of Series C Junior Participating Preferred Stock of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed April 10, 2020 (File No. 001-34236))


2.1	Agreement and Plan of Merger, dated as of October 19, 2020, by and among the Company, Endo International plc, and Beta Acquisition Corp. (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on October 19, 2020 (File No. 000-19879))
3.2	Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-3 (File No. 333-239484))


4.1	Amendment No. 1 to Rights Agreement, dated as of October 19, 2020, to the Rights Agreement, dated as of April 10, 2020, by and between the Company and Worldwide Stock Transfer, LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on October 19, 2020 (File No. 000-19879))
4.1	Rights Agreement, dated as of April 10, 2020, by and between the Company and Worldwide Stock Transfer, LLC, as rights agent (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed April 10, 2020 (File No. 001-34236))


31.1**	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10.1	Separation of Employment Agreement and General Release, dated April 6, 2020, by and between the Company and J. Kevin Buchi (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed on May 11, 2020 (File No. 000-19879))


31.2**	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
10.2	Letter Agreement, dated April 6, 2020, by and between the Company and Joseph Truitt (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q filed on May 11, 2020 (File No. 000-19879))


32.1**	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
10.3	Employment Agreement, dated May 7, 2020, by and between the Company and Joseph Truitt (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed on May 11, 2020 (File No. 000-19879))


101.INS	XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
10.4	Confidentiality and Inventions Assignment Agreement, dated April 1, 2020, by and between the Company and Joseph Truitt (incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q filed on May 11, 2020 (File No. 000-19879))


101.SCH	Inline XBRL Taxonomy Extension Schema
10.5*	Amendment to Letter Agreement, dated June 4, 2020, by and between the Company and Patrick Hutchison


101.CAL	Inline XBRL Taxanomy Extension Calculation Linkbase Document
10.6*	Employment Agreement, dated June 19, 2020, by and between the Company and Alex Monteith


101.DEF	Inline XBRL Taxanomy Extension Definition Linkbase Document
31.1**	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


101.LAB	Inline XBRL Taxonomy Extension Labels Linkbase Document
31.2**	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
32.1**	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


104	Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101
101.INS		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH		Inline XBRL Taxonomy Extension Schema

101.CAL		Inline XBRL Taxanomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxanomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101

*	filed herewith

**	furnished herewith

3336

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


	BIOSPECIFICS TECHNOLOGIES CORP.


Date: August 10, 2020	/s/ Joseph Truitt
Date: November 9, 2020	/s/ Joseph Truitt
	Joseph Truitt
	Chief Executive Officer and Principal Executive Officer

3437

Filing Compare · BIOSPECIFICS TECHNOLOGIES CORP